Achieving Achieving Ukraine's Agricultural Potential Uk Stimulating Agricultural Growth And Improving Rural Life raine 'sAgricultural Potential THE WORLD BANK 1818 H Street, NW Washington, DC 20433 Telephone 202-473-1000 Internet www.worldbank.org THE Email feedback@worldbank.org WORLD BANK OECD 2, rue André Pascal THE WORLD BANK F-75775 Paris Cedex 16 Organization for Economic Co-operation and Development France & the Environmentally and Socially Sustainable Development Unit, Europe and Central Asia Region, The World Bank Achieving Ukraine's Agricultural Potential Stimulating Agricultural Growth and Improving Rural Life Joint Publication by the Organization for Economic Co-operation and Development and the Environmentally and Socially Sustainable Development Unit, Europe and Central Asia Region, The World Bank © 2004 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone 202-473-1000 Internet www.worldbank.org E-mail feedback@worldbank.org Manufactured in the United States of America First Printing: June 2004 All rights reserved. The Europe and Central Asia Environmentally and Socially Sustainable Development Unit (ECSSD) of the World Bank and the Organization for Economic Co-operation and De- velopment (OECD), distributes this working paper to disseminate findings of work in progress and to encourage the exchange of ideas among Bank staff and all others interested in development issues. This paper carries the names of the author(s) and should be used and cited accordingly. The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the Board of Executive Di- rectors of the World Bank or the governments they represent. For submission of comments and suggestions, and additional information, including copies of this report, please contact Iain Shuker at: 1818 H Street N.W. Washington, DC 20433, USA Email: ishuker@worldbank.org Cover photos by: Lidia Warring, IFC Ukraine and Yuriy Aleshin and Gennadiy Marychev, Ukraine Contents A C R O N Y M S A N D A B B R E V I A T I O N S xi A B S T R A C T xiii P R E F A C E A N D A C K N O W L E D G M E N T S xv E X E C U T I V E S U M M A R Y xvii C H A P T E R 1 Agricultural Sector Performance 1 2 Agricultural Policy Framework 13 3 Domestic Support Measures 23 4 Trade Policy and WTO Accession 51 5 Evaluation of Support to Ukrainian Agriculture 73 6 Land Reform and Farm Restructuring 83 7 Competitiveness and Structural Change in the Agroprocessing Sector 97 8 Rural Livelihoods and Rural Poverty--Assessment and Solutions 115 9 Rural Public Services Infrastructure 135 B I B L I O G R A P H Y 147 A N N E X 1 Commodity Specific Performance Indicators 153 2 Changes in the Tax System for Agricultural Enterprises, 1997-2001 165 3 OECD Indicators of Support to Agriculture: Definitions 167 4 Agricultural Policies and Support for Individual Commodities 171 5 Agroprocessing Sector 191 iii iv Contents LIST OF FIGURES Figure E.1: Evolution of Producer Support (%PSE) in Ukraine and Selected Countries (1986-2001) xxi Figure E.2: Dynamics of Gross Agricultural Output in 1990-2001 xxii Figure E.3: FDI in the Food Industry xxiv Figure E.4: Distribution of Total per Capita Monthly Income, 2001 (Q1-Q3) xxv Figure E.5: Housing Amenities in Ukraine (2000) xxvi Figure 1.1: The Role of Agriculture in the National Economy 2 Figure 1.2: Mineral Fertilizer Application Rates and Changes in Grain Yields 5 Figure 1.3: Major Trends in Physical Volume of Crop Production (1000 tons) 6 Figure 3.1: Changes in Profits and Tax Liabilities for Agricultural Enterprises 40 Figure 3.2: Changes in the Level and Structure of Gross Taxes of Agricultural Enterprises, 1998-2001 40 Figure 3.3: Composition of Direct Budgetary Transfers to the Agro-food Sector in 1992-2001 49 Figure 4.1: Agricultural Trade in Ukraine, 1994-2001 52 Figure 4.2: Ukraine's Main Agro-food Exports, 2001 54 Figure 4.3: Ukraine's Main Agro-food Imports, 2001 54 Figure 4.4: Ukraine's Agro-food Exports by Regions in 1996 and 2001 55 Figure 4.5: Ukraine's Agro-food Imports by Regions in 1996 and 2001 56 Figure 4.6: Distribution of Ukraine's Import Tariff Rates on Agro-food Products in 2001 61 Figure 4.7: Ukraine: MFN Tariffs, Price Differentials and 2005 Binding Tariffs for Selected Agricultural Commodities, 1993-2001 70 Figure 5.1: Evolution of Producer Support (%PSE) in Ukraine and Selected Countries in 1986-2001 76 Figure 5.2: Percentage PSE by Country, EU and OECD Averages in 2000-2001 76 Figure 5.3: Evolution of Consumer Support (%CSE) in Ukraine and Selected Countries in 1986-2001 77 Figure 5.4: Composition of Producer Support Estimate, 1992-2001 78 Figure 5.5: Total Support Estimate in Ukraine and Selected Countries, 1999-2001 79 Figure 5.6: Ukrainian %PSE by Commodity in 2001 80 Figure 5.7: Distribution of Total Producer Support by Commodity in 2001 81 Figure 6.1: Length of Land Rental Agreements (years) in 2000 87 Contents v Figure 6.2: Distribution of Newly Created Agricultural Enterprises by Number of Shareholders 89 Figure 6.3: Profitability Indicators for Farm Enterprises 91 Figure 7.1: Share Value by Degree of Privatization, January 1, 2002 104 Figure 7.2: Percent of Share Value by Degree of Privatization, January 1, 2002 104 Figure 7.3: FDI in the Food Industry 108 Figure 7.4: Farm to Export Margin 110 Figure 7.5: Farm to Retail Margins 111 Figure 8.1: Distribution of Total per Capita Monthly Income, 2001 (Q1-Q3) 119 Figure 8.2: Percent Deviation from the Mean of Yearly Expenditures of Rural Households 119 Figure 8.3: Per Capita Food Consumption Trends 124 Figure 8.4: Age and Gender Distribution of Rural Population 126 Figure 8.5: Education Level of the Head of Household, 2001 126 Figure 8.6: Distribution of Housing Stock in Rural Areas 130 Figure 9.1: Housing Amenities in Ukraine 2000 137 Figure 9.2: Distribution of Rural Settlements by Size of Population, January 1, 2002 139 Figure A4.1: Percentage PSEs, Producer and Reference Prices for Wheat, 1986-2001 173 Figure A4.2: Percentage PSEs, Producer and Reference Prices for Maize, 1986-2001 175 Figure A4.3: Percentage PSEs, Producer and Reference Prices for Other Grains (rye, barley, and oats), 1986-2001 175 Figure A4.4: Percentage PSEs, Producer and Reference Prices for Oilseeds (sunflower), 1986-2001 177 Figure A4.5: Percentage PSEs, Producer and Reference Prices for Sugar, 1986-2001 179 Figure A4.6: Percentage PSEs, Producer and Reference Prices for Milk, 1986-2001 183 Figure A4.7: Percentage PSEs, Producer and Reference Prices for Beef and Veal, 1986-2001 186 Figure A4.8: Percentage PSEs, Producer and Reference Prices for Pigmeat, 1986-2001 187 Figure A4.9: Percentage PSEs, Producer and Reference Prices for Poultry Meat,1986-2001 189 Figure A4.10: Percentage PSEs, Producer and Reference Prices for Eggs, 1986-2001 190 vi Contents LIST OF TABLES Table 1.1: Comparison of Yields for Selected Commodities 2 Table 1.2: Position of Agriculture in the National Economy 3 Table 1.3: Agricultural Trade, 1992-2002 4 Table 1.4: Structure of Grain Production 6 Table 1.5: Grain Marketed by Market Participants 7 Table 1.6: Grain Balance 8 Table 1.7: Productivity Indicators for Sunflowers 9 Table 1.8: Profitability of Sunflower Production 9 Table 1.9: Major Indicators of Sunflower Sector 9 Table 1.10: Sugar Balance 10 Table 3.1: Annual Average Interest Rates on Loans Extended in the Local Currency 1998-2002 41 Table 3.2: Average Nominal Commercial Interest Rate for Loans in 2000 and 2002 42 Table 3.3: Selected Indicators of Social Assistance to Low-Income Groups in Ukraine, 1995-2001 46 Table 3.4: Share of Household Money Expenditures Spent on Food, Food Price and Money Income Indices, 1990-2001 46 Table 3.5: Per Capita Consumption of Main Food Products in Ukraine in 1990-2001 46 Table 3.6: Budgetary Transfers to the Agro-food Sector in 1992-2001 48 Table 3.7: Composition of Direct Budgetary Transfers to the Agro-food Sector in 1992-2001 49 Table 4.1: The Share of Agricultural Exports in GAO and AGVA in Ukraine and Selected Countries in 2000 52 Table 4.2: Ukraine's Net Exports of Major Agro-Food Products in 1995-2001 53 Table 4.3: Ukraine's MFN Import Duties on Selected Agro-food products, 1993-2002 59 Table 4.4: Ukraine's MFN Import Tariffs on Selected Agro-Food Products in Ad Valorem Terms, 1993-2001 60 Table 4.5: Export Duties for Agro-food Products in Ukraine between 1993 and 2002 63 Table 5.1: Aggregate %PSEs and %CSEs for Ukraine 74 Table 5.2: Indicators and Composition of Total Support to Ukrainian Agriculture 79 Contents vii Table 5.3: Ukrainian %PSE by Commodity, 1986-2001 80 Table 6.1: Structure of Agricultural Lands Used by Non-state-owned Agricultural Enterprises as of January 1, 2003 88 Table 6.2: Profitability of Agricultural Enterprises 91 Table 6.3: Size and Number of Independent Private Farms in Ukraine 91 Table 6.4: Agricultural Gross Production 92 Table 6.5: Major Indicators of Private Household Plots 93 Table 7.1: Food Industry in the National Economy 98 Table 7.2: Growth in Output and Gross Value Added per worker, 1996 98 Table 7.3: Comparison of Food Industry Shares in CEECs, 2000 99 Table 7.4: Description of Food Subsectors in Ukraine, 2001 99 Table 7.5: Comparison of Output per Worker in Ukraine (2001) with CEECs (1999 and 2000) 100 Table 7.6: Dynamics of Ukraine Food Industry Output 101 Table 7.7: Dates and Methods of the Privatization of AIC Enterprises by Share 106 Table 8.1: Comparison of Household Monthly Incomes in Rural and Urban Areas 116 Table 8.2: Structure of Cash Income of Rural and Urban households in Ukraine 117 Table 8.3: Ukraine: Headcount Poverty and Extreme Poverty Rates By Location, 1999-2002 Three Quarters 120 Table 8.4: Ukraine: Vulnerability Rates, Location, 1999-2001 121 Table 8.5: Structure of Income for Different Categories of Rural Residents in 2001 122 Table 8.6: Poverty Quotient Change Over Time for Very Poor Households, in Rural Areas 123 Table 8.7: Food Consumption in Urban and Rural Households in 2000 124 Table 8.8: Demographic Information about Rural Population, January 1 of each year 125 Table 8.9: The Balance of Rural Population 125 Table 8.10: The Structure of Rural Employment 127 Table 8.11: Structure of Employment by Type 128 Table 8.12: Ownership of Rural Housing 129 Table 8.13: Poverty Profile of Rural Households in 2001 132 viii Contents Table 9.1: Social Infrastructure in Rural Areas 136 Table 9.2: Development of Rural Social and Cultural Infrastructure 137 Table 9.3: Number of Rural Settlements with Utility Services 138 Table 9.4: Rural Residents with No Access to Utility Services, as of January 1, 2001 138 Table 9.5: Rural Infrastructure Development 139 Table 9.6: Major Sources of Revenues for Village Radas 144 Table A1.1: Structure of Agricultural Production in Ukraine 153 Table A1.2: Structure of Gross Sales of Farm Enterprises 154 Table A1.3: Volume and Structure of Grain Production in Ukraine 154 Table A1.4: Structure of Grain Production 155 Table A1.5: Productivity Indicators for Grain 155 Table A1.6: Financial Indicators of Grain Marketing 155 Table A1.7: Grain Produced and Marketed 156 Table A1.8: Grain Balance 157 Table A1.9: Major Indicators of Sunflower Sector 157 Table A1.10: Profitability of Sunflower Production 158 Table A1.11: Productivity of Sugarbeet Production 158 Table A1.12: Profitability of Sugarbeet Production 158 Table A1.13: Sugar Balance 159 Table A1.14: Major Indicators of Ukraine's Meat Sector 159 Table A1.15: Recent Changes in Animal Numbers 160 Table A1.16: Meat Marketing and Profitability Indicators 161 Table A1.17: Meat Marketing Indicators, by Type of Marketing Agent 161 Table A1.18: Meat Balance 162 Table A1.19: Milk Sector: Production and Profitability Trends 162 Table A1.20: Milk Marketing Indicators by Type of Marketing Agent 163 Table A1.21: Production of Milk Products 163 Table A1.22: Milk Balance 164 Table A1.23: Structure of Milk Balance 164 Table A2.1: The System of Taxes for Agricultural Enterprises 165 Table A2.2: The Structure of Taxes and Tax Privileges of Agricultural Enterprises 166 Contents ix Table A4.1.: Domestic Sugar Quota and Minimum Prices 179 Table A4.2: Per Ton Payments for Milk, 1992-2001 182 Table A4.3: Per Ton Payments for Cattle, 1992-2001 185 Table A4.4: Per Ton Payments for Pigmeat, 1992-2001 187 Table A4.5: Per Ton Payments for Poultry Meat, 1992-2001 188 Table A5.1: Description of Food Subsectors of Ukraine, 2001 192 Table A5.2: Dynamics of Ukraine Food Industry Output 193 Table A5.3: Dynamics of Employment and Output of Food Industry of Ukraine, 1996-2001 193 Table A5.4: Privatization of Agro-Industrial Enterprises, as of January 1, 2002 194 Table A5.5: Degree of Privatization by the Value of Shares Sold, Jan 1, 2002 194 Table A5.6: Direct Foreign Investments Into the Food Industry of Ukraine (as of January 1, 2002) 195 Table A5.7: Farm to Export Margins in $/ton and as % of Farm Price 195 Table A5.8: Wholesale Price and Farm to Retail Margins as % of Wholesale Price 196 Table A5.9: Ukraine Export Prices Compared to World Prices 197 LIST OF BOXES Box 3.1: Chronology of Agricultural Enterprise Debt Restructuring in Ukraine, 1992-2001 24 Box 3.2: Regional Resources of Agro-food Products: An Unclear Concept and Ambiguous Practices 26 Box 4.1: Ukraine's Progress in the Negotiation Process on Agriculture, November 2003 68 Acronyms and Abbreviations AMS Aggregate Measurement of Support ARD Agency for Rural Development BSE Bovine Spongiform Encephalitis CAE Collective Agricultural Enterprises CAM Common Agricultural Market (of the CIS) CAP Common Agricultural Policy (of the European Union) CEE Central and Eastern Europe CEEC Central and Eastern European Countries CEFTA Central Europe Free Trade Agreement CIF Customs, Insurance and Freight CIS Commonwealth of Independent States CMO Common Market Organization CN Combined Nomenclature CSE Consumer Support Estimate ECU European Currency Unit EU European Union FTA Free Trade Area FDI Foreign Direct Investment FMD Foot and Mouth Disease GAO Gross Agricultural Output GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product GOU Government of Ukraine GSP Generalized System of Preferences xi xii Acronyms and Abbreviations GSSP General Services Support Estimate GUAM Georgia, Ukraine, Azerbaijan, Moldova GUUAM Georgia, Ukraine, Uzbekistan, Azerbaijan, Moldova GVA Gross Value Added HTU Higher Territorial Unit IFI International Financial Institution MFN Most Favored Nation MPS Market Price Support NBU National Bank of Ukraine NIS Newly Independent States OECD Organization for Economic Cooperation and Development PCA Partnership and Cooperation Agreement (between Ukraine and the EU) PSE Producer Support Estimate SPS Sanitary and Phytosanitary (measures) TBT Technical Barriers to Trade TRQ Tariff Rate Quota TSE Total Support Estimate TRIPS Trade Related International Property Rights UAH Hryvnia UNDP United Nations Development Program USAID United States Agency for International Development USDA United States Department of Agriculture VAT Value Added Tax WTO World Trade Organization Abstract T his study provides a review of the food and agricultural sector in Ukraine. It assesses the current status of the food and agricultural sector with special ref- erence to the agricultural policy regime and the form and level of government support to the sector. The paper reviews the sector's readiness to compete on open global markets for food and agricultural products. Given the importance and sensitiv- ity of the food and agriculture sector in the country, the report highlights a number of critical issues for the Ukrainian government to address. The report goes beyond the nar- rower focus of the agricultural policies and reviews the status of current rural physical and social infrastructure and issues of rural poverty. The Executive Summary highlights policy recommendations for Ukrainian policy- makers, while the individual chapters provide technical analysis on key policy issues. xiii Preface and Acknowledgments T his study was prepared as a joint undertaking of the World Bank, the OECD and the Government of Ukraine. The study outlines a forward-looking policy agenda, assesses the development and current status of agricultural policies and institutions and presents for the first time internationally comparable estimates of support to the Ukrainian agricultural sector based on Producer and Consumer Support Estimates (PSE/CSE) developed by OECD. Going beyond the boundaries of the agricultural sec- tor, the report also encompasses the entire rural space surrounding agriculture, including rural physical and social infrastructure and the extent of rural poverty. The study was managed and compiled by Iain Shuker (World Bank, ECSSD), with the support of Csaba Csaki (World Bank, ARD). At the OECD, Andrzej Kwiecinski and Olga Melyukhina (Directorate for Food, Agriculture and Fisheries) prepared the sections concerned with the agricultural and trade policies and provided estimates of the level of support to the Ukrainian agricultural sector. The study is the result of efforts by a large team of Ukrainian and international experts. On the Ukrainian side, Mykola Pugachov, Natalya Seperovich, Inna Chapko, and Iryna Kobuta from the UNDP Agricultural Policy for Human Development Project (funded by USAID), were the major contributors, together with Sergey Sotnikov, a World Bank consultant, who also coordinated the work in Kyiv. From the Ministry of Agricultural Policy of Ukraine, Mykola Bezugly and Vitaly Drobot coordinated the activities under this study and provided valuable inputs. Willi Meyers, a World Bank consultant, was responsible for the agri-business section. Oleksandr Sikachin, Vitaliy Zhigadlo, and Oleksandr Yaroslavsky from the UNDP Agricultural Policy for Human Development Project, and Florence Mauclert, a World Bank and OECD consultant also provided analytical sup- port, while Oleksandr Shevtsov and Volodymyr Artiushin coordinated the inputs of the UNDP Agricultural Policy for Human Development Project. Aleksander Kaliberda of the World Bank's Kyiv office provided overall support to the project. Editorial assis- tance was provided by Alan Zuschlag and Sonali Wijayanandana (World Bank, ECSSD). The OECD contribution to the study was made possible through voluntary contributions from Finland and Poland. xv Executive Summary S timulating efficiency-driven agricultural output growth, developing more off- farm employment, and improving rural public services are the critical factors in the recovery of the Ukrainian agricultural and rural economies. Ukraine's agri- cultural sector experienced one of the most severe and prolonged economic declines of any economy in the Former Soviet Union or Eastern Europe. Fortunately, in recent years, output in the sector has begun to stabilize. Building on the significant progress made since 1999 in land reform, more stable trade policy, and a discontinuation of highly distortive commodity credit programs, the agricultural sector in Ukraine is poised for a period of improved efficiency and growth. One of the consequences of this efficiency-driven growth, however, will be a continued decline in formal farm employ- ment. Implementing strategies for absorbing surplus labor in rural areas and improving the quality of services for rural residents will be crucial to the economic and political success of the agricultural reform program. Stimulating agricultural growth and productivity. Efficiency driven growth in agri- cultural GDP is a priority for Ukraine. Agricultural GDP declined by 51% between 1991 and 1999, recovered by 10 % per year in both 2000 and 2001, increased by 1.2% in 2002 and declined again by 18% in 2003. This economic decline has been one of the most severe and prolonged in Eastern Europe and the former Soviet Union. Some of this decline was the result of a collapse in the general economy, but this recession was made deeper and longer than in other transition economies by slow and inconsistent policy reforms for most of the 1990s. Post 1999, improvements in land reform and agri- cultural enterprise1 restructuring and discontinuation of the highly distortive state com- modity credit program have provided a base for making agriculture more efficient and 1The terminology used to describe different categories of farms will follow the standard Ukrainian legal definition of farm categories. Household plots are parcels of land that are owned by private individuals and may not exceed 2 hectares. Independent private farms are owned by private individuals and are larger than 2 hectares. Agricultural enterprises are farming enterprises (generally large farms) that are owned by legal entities such as cooperatives, part- nerships, collective farms, joint stock companies or are owned by private individuals. Individual owners may elect to register their holdings as either agricultural enterprises or as independent private farms. xvii xviii Executive Summary thus stimulating growth. Future reforms required to stimulate growth are outlined in more detail below, but the key will be to avoid ad hoc government interference in agri- cultural markets, such as administrative limits on prices and profit margins and restric- tions on grain movement, and to avoid the sudden reversals in policy seen in the 1990s and more recently in 2003. Provision of a good environment for job creation and improving public services. For- mal employment positions for rural residents declined by 30% between 1990 and 2000. As the agriculture sector becomes more efficient the number of such positions in the agri- cultural sector will decline even further. Most of the surplus labor has thus far been ab- sorbed into subsistence farming on individual land plots. However, with about 25% of Ukraine's labor force based in rural areas, subsistence farming is not a sustainable long- term solution. Off-farm job creation and improved public services in rural areas are needed to prevent increased rural poverty and large-scale urban migration, together with their as- sociated social problems. Simultaneous implementation of an agricultural growth strategy and a rural devel- opment strategy is important. The need for an agricultural growth strategy based on improving the efficiency of the agriculture sector is clear. Without it the sector will continue to stagnate. However, it is important to mitigate the effects of reduced rural employment opportunities that will result from improved efficiency in the agricultural sector through programs that develop off-farm employment and provide public services in rural areas. Without medium-term improvements in the quality of rural life, the agricultural reform program may loose credibility and political support. Stimulating Agricultural Growth and Productivity A stable macroeconomy and growing incomes will help the agricultural sector. Macroeconomic instability caused huge problems for the agriculture sector in the 1990s, making the sequencing of agricultural reforms extremely difficult. Declining de- mand for agricultural products, a period of high inflation between 1991 and 1993, cur- rency appreciation between 1995 and 1998 followed by rapid depreciation in 1998, all made agricultural economic reforms in the 1990s more difficult. Fortunately, real incomes have begun to increase, and inflation and exchange rates have stabilized, which improves the prospects for the agricultural sector. But, real in- terest rates on loan funds remain high due to political risk and structural inefficiencies in the banking and property rights systems. Lead times required for agricultural pro- duction and investments are longer term than in most other industries, making low real and nominal interest rates critical for its development. Maintaining macroeconomic stability and improving the efficiency of the banking and property rights systems should be the top priority for the policy makers concerned with development of the agricultural sector. Promote a stable and predictable, market oriented policy environment. Sharp agri- cultural policy reversals exacerbated the economic decline of the agricultural sector in Executive Summary xix 1990s. Some of these ad hoc policy changes were an attempt to compensate for the above mentioned macro policy distortions, but in many cases they were misguided at- tempts to prop up inefficient farms, input supply chains or agro-processors, or to main- tain parts of a centrally planned system in the context of a market economy. This created a high-risk investment climate in the agriculture sector. As a result farm managers, in- vestors, banks, input suppliers and traders avoided making new investments in the agri- cultural sector or charged high margins to compensate for the risk. An example of a detrimental policy reversal was the introduction of the "state com- modity credit" program in 1996. This program resulted in restrictions on grain move- ments after some progress in market liberalization between 1994 and 1995, and reintroduced the direct government participation in commercial input supply and grain markets. This caused the private sector to significantly reduce the supply of inputs and credit to the sector, resulting in further declines in grain production. Government in- terference in grain markets in 2003 has again added risk for input supply, credit and agricultural marketing companies, causing them to reduce supplies and charge higher margins, thus reducing the efficiency of the agricultural sector. In order to increase investor confidence in the agricultural sector, the Ministry of Agriculture should prepare a clearly articulated medium-term agricultural policy frame- work and then systematically implement this policy. Ad hoc reversals in policy, such as the reintroduction of price and grain movement controls in the 2003 season, or in the period 1996 to 1999, should be avoided, as they create additional uncertainty in the agricultural sector and increase risk for producers, investors and lenders. The policy orientation should shift away from intervening in markets and instead support the development of market infrastructure and market institutions. If market interventions are necessary, they should be rule based and transparent to all market participants. Such a strategy would be the most efficient for the reduction of transactions costs and insta- bility on agricultural markets and ultimately, for a sustained agricultural growth. Trade policy keeps improving, but there are some notable exceptions. Relative to other countries with similar agricultural capacity, Ukrainian agricultural exports are low. For example, in 2000 the ratio of food exports to Gross Agricultural Output for Ukraine was 14%, compared to 25% for Poland and 53% for France and Germany. Given Ukraine's agricultural resources, trade policy has critical importance for future agricultural growth. Ukraine has made significant progress in agricultural trade policy since the early 1990s, moving exports from largely barter based bilateral agreements with countries of the NIS, to a more diversified set of export destinations based on private market trans- actions. Export quotas that were used in the early 1990s have largely been removed, but the use of "indicative prices" and export taxes remains a restriction for a few selected products, such as sunflower and live animals. Imports of agricultural products, on the other hand, are still restricted by a large number of tariff and non-tariff barriers. Statutory tariffs increased sharply between 1997 and 1999 followed by a period of stabilization in 2000 and 2001. The specific duties in ad valorem terms for sunflower, sugar and poultry were all above 100% in 2001. Even xx Executive Summary wheat had an import tariff rate of 44%. Ukraine also applies a number of non-tariff barriers, including quotas licenses and import bans which quite often lack transparency and are expensive by international norms. The State Committee for Standardization of Ukraine imposes numerous (often unnecessary) technical standards and certification requirements on many imports. The Committee also fails to recognize foreign product certificates even if issued in accordance with international standards. Ukrainian accession to WTO is vitally important for agricultural trade. It will improve the constancy, transparency, and predictability of trade relations and adherence to multilateral rules and disciplines. This will provide a more stable framework for domestic and foreign agents, thus reducing risk and encouraging investment. Transport costs would also be reduced due to the guaranteed freedom of transit through the territory of WTO member states. It will also mean that, with binding tariffs for almost all agricultural products fixed at no more than 20%, there will be a substantial drop in border protection. However, as demonstrated in more detail in the paper, this is expected to have very little downward pressure on domestic prices for crops where Ukraine is a net exporter. It will reduce domestic price fluctuations for agricultural products that switch between net export and net import positions. Commodities where Ukraine is a net importer and does not have a cost advantage in production, such as sugar, could experi- ence downward pressure on prices. In order for Ukraine to gain the full advantage of WTO accession, it is important that Ukraine establish a sound scientific, consistent, and transparent approach to determining pest and disease risks associated with agro-food trade, both to be able to participate effectively in Sanitary and Phytosanitary measures in cooperation with other countries, but also to apply appropriate, least trade restrictive measures to manage that risk for crop and animal imports. This is a difficult and expensive undertaking and will require the adoption of international standards and the commitment of public funds to regulation and testing facilities. Aggregate support to Ukrainian agriculture has stabilized at moderate levels, how- ever, distortions in individual commodity sectors are significant. Producer Support Estimate (PSE) was very high prior to the start of market reforms in 1992, followed by a period of strong producer taxation. By the late 1990s the support had recovered and sta- bilized at a relatively low level, meaning a significant reduction in overall policy distor- tions in the course of the transition. The PSE of 5% is currently one of the lowest among the transition countries analyzed (Figure E.1). The aggregate low level of producer support, however, disguises the strong varia- tions across commodities, with relatively high support for poultry (35%), pigmeat (33%), eggs (21%) and sugar (30%), and a strong taxation of milk (-25%). This is largely the result of persistent price distortions in these sectors arising from Government policies, but also infrastructural and institutional weaknesses of Ukrainian agricultural markets. The Government will need to adopt policies reducing market price distortions, particularly in these specific sectors. The land reform and farm restructuring program is gaining momentum. The land reform program began in March 1991 but made very slow progress until 1999. During this period land was transferred from state to collective ownership, which resulted in very Executive Summary xxi F I G U R E E . 1 Evolution of Producer Support Estimate (%PSE) in Ukraine and Selected Countries (1986­2001) Ukraine Bulgaria Poland Russia OECD 100 % 80 % 60 % 40 % 20 % 0 % -20 % -40 % -60 % -80 % -100 % 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: OECD. little de facto change in the structure or operation of collective and state farms. A Presi- dential Decree issued in 1999 provided the impetus for genuine farm restructuring. This decree gave new impetus to the Government's program of systematically demarcating land and issuing State Acts for Land (land titles) to individual land owners in rural areas. An estimated 58% of rural residents had received State Acts by January 1, 2004. The new Land Code passed in October 2001 was a major breakthrough for land reform as it allows ownership and transfer of agricultural land. There are a number of positive developments that have already resulted from the Government's recently revised land policy. Rental markets for land have evolved very quickly and have begun to provide a new source of income for rural residents. Rental payments per annum for the average land parcel remain low, but provide the equivalent of about two and a half months wages for an agricultural worker. The number of inde- pendent private farms has increased sharply from about 35,000 in 1999 to 43,000 in 2003 and the average size of a private farm has increased from 29 hectares to 66 hectares in the same period, while their share in overall agricultural output continues to increase as well (Figure E.2). This is an indication that independent private farms are success- fully taking over and profitably using land that cannot be efficiently used by large farm- ing enterprises. There are also signs that large farm enterprises, which still control most of the agricultural land in Ukraine through leases, are becoming more profitable and are responding more quickly to changes in market conditions as a result of more effi- cient ownership structures. xxii Executive Summary F I G U R E E . 2 Dynamics of Gross Agricultural Output in 1990­2001 140 130 120 110 100 001= 90 80 70 60 1990 50 40 30 20 10 0 1990 1995 1996 1997 1998 1999 2000 2001 2002 Real GDP Industrial output Gross agricultural output, real Gross agricultural output, agricultural enterprises, real Gross agricultural output, private farmers and households, real Source: Author's calculations based on State Committee of Ukraine for Statistics Publications. One of the main problems with the land reform and farm restructuring process thus far has been the slow pace of non-land asset distribution (e.g. machinery), which has resulted in concentrating the primary means of production in the hands of small groups of former collective farm insiders. In the short run this has had the effect of limiting the pool of potential land renters and placing downward pressure on land rental prices, which the Government has regulated through a mandatory floor price. In the longer run it cre- ates the risk of distorted wealth and power structures in rural areas that will result in a rapid concentration of land ownership, with negative social and economic consequences. One of the first priorities for the Government over the next three to five years should be to complete the process of land parcel demarcation and issuance of state acts. In carrying out this process Government policy will need to follow a middle road by preventing very rapid consolidation of land in the hands of a small number of individ- uals or over-fragmentation of farm operating units into sizes that are not viable. One of the key factors in preventing the rapid consolidation of land ownership will be to com- plete the distribution of non-land assets. Property rights and rural credit issues will be important constraints to growth in Ukrainian agriculture in the next five to ten years. Once the macroeconomic and banking system problems discussed above have been resolved, the next binding con- straints to medium- and long-term credit will be the availability of assets usable as col- lateral against which banks can lend. Ukraine is asset rich. Rural land alone is conservatively estimated to be worth about US$40 billion. But most of these assets can- not be used as collateral because the legal framework and institutions are not in place Executive Summary xxiii to support their use in this regard. These assets are considered to be "dead" for credit purposes. The key to making these assets available as collateral is to develop the legal and regulatory framework for property rights. The Government and Parliament are currently working on legislation on secured transactions, a movable property rights registry, a cadastre and title registry, mortgage law, and improved banking laws. There is a rudimentary registry for movable assets which needs to be further developed to be efficient. The development of a unified property reg- istry system, to be financed by international donors and International Financial Institu- tions (IFIs), is planned for the next two years, and when installed, will provide a guarantee of ownership rights and record mortgages and other liens on properties. These laws and institutions will make the use of collateral possible. A functioning property rights system is a precondition for increased medium- and long-term credit to agriculture. The sooner these laws and institutions are in place, the sooner efficient medium- and long-term credit markets will begin to develop. Agroprocessing privatization is increasing the efficiency of processing and mar- keting. An agro-processing industry which is capable of producing internationally com- petitive food products is an essential pre-condition for utilizing Ukraine's significant agricultural potential. The privatization of Ukraine's agro-processing sector is already quite advanced. This has begun to show positive results in some industries by increasing efficiency and reducing margins. With real output and real gross value added (GVA) in the food industry growing from 25% and 40% between 1996 to 2001 (4.4% to 7.0% per annum), respectively, and employment in the sector declining by 10% (2.3% per annum), the output and GVA per worker increased by 40% and 57%, respectively. This increase in GVA per worker in the food sector was significantly larger than for the economy as a whole, or for the manufacturing sector as a whole. In the commodity marketing sector, margins for farm-to-export markets for five of the top six export products have declined over time. One of the factors that seems to have contributed to the improvement of efficiency in the farm to export marketing is the entry of private intermediaries who can better manage and coordinate the flow of goods. A rea- sonable explanation for the observed improvements is that as more of the storage, han- dling, and processing facilities for grains and oilseeds have been privatized, the new ownership, including foreign investors, has been able to improve the efficiency of these marketing channels. However, it is clear that there remains substantial potential for fur- ther reduction of transactions costs, especially with regard to numerous tariffs for trans- port, inspection, and certification that remain under Government control. A recent study of the sunflower sector found that administrative charges and fees levied by the Government at various stages of rail transport are actually higher than the basic rail trans- port tariffs and clearly reduce competitiveness of Ukrainian products. The volatility of these margins and the significant differences between such similar commodities as wheat and barley characterize a marketing system that is still maturing and is still subject to pol- icy instability and lack of stable marketing channels and institutions. Despite all the progress made in the agribusiness sector, many of the new owners do not have the financial resources for technological improvements and have made less xxiv Executive Summary investment and improvement in efficiency than initially expected. The agro-processing industry is still not capable of being an engine of agricultural growth, or produce the quality of processed products required by the international marketplace. There is a need for completing the sales of remaining government ownership in agro-processing firms, significant post-privatization restructuring, and promotion of further foreign direct investment (FDI). All of these should remain a high priority for policymakers (Figure E.3). Improving Rural Life Stimulating off-farm employment should be a top priority. Formal employment in the agricultural sector has been declining as a result of downsizing in the agricultural sector and increased efficiency of labor, forcing an increasing number into subsistence agriculture. As a result, the livelihoods of a growing number of people in rural areas are based on a shrinking income base. At the same time, the demand for social support is increasing due to the social problems of transition, while the supply of public funds that are available for social programs are shrinking. A clear strategy for social development and increasing rural employment needs to be developed and implemented in order to address present and future social problems in rural areas. It is estimated that between 1990 and 2000, the net number of formal positions held by rural residents declined by 2.4 million. At the same time the rural work force has remained at 7.8 million, meaning that 30% of economically active rural residents lost formal employment positions. Wages as a share of agricultural production cost declined from 33% of agricultural production costs in 1990 to 13.5% in 2000. By 2000 agricultural wages were half of the level of wages in the rest of the economy. In order to compensate for the decline in formal wages and reduced opportunities for rural wage F I G U R E E . 3 FDI in the Food Industry 6 000 25,0% 5 000 20,0% $S 4 000 FDI U 15,0% all 3 000 of illion 10,0% m2 000 percent 1 000 5,0% 0 0,0% 1995 1996 1997 1998 1999 2000 2001 2002 Food Industry Percent of total Source: State Committee of Ukraine for Statistics. Executive Summary xxv labor, rural households have increasingly turned to household plot production as a source of household food consumption and cash income. By 2001, household plot pro- duction was the primary source of income for the average rural household. In many cases these incomes are not sufficient to avoid poverty. In 2001, 37% of rural residents, using the Ukrainian official definition of poverty, had incomes below the poverty line. On average, rural households use 70% of their household income on food. Rural house- holds continue to be poorer and more vulnerable than urban ones. Household food production and access to land have been critically important in providing a social safety net for the rural population. Otherwise, Ukraine would have faced a humanitarian disaster during the transition. However, subsistence farming for a large segment of the population is not a sustainable solution in the medium- to long- term. The low incomes seen today in rural areas could lead to a permanent state of poverty for a large segment of the rural population, as they are unable to finance health- care and education, or replace or accumulate assets that improve their quality of life (Figure E.4). Looking forward, the Government will need to develop policies that encourage off- farm employment in rural areas. Providing public services such as village markets, good rural roads, reliable electricity and water supplies, while at the same time reducing reg- istration fees, market access payments, and taxes for small entrepreneurs and rural busi- nesses, will be important for increasing off-farm rural employment in the medium-term. High quality rural education and health programs will also be important for allowing the next generation of rural born residents to seek employment in urban areas. For those that remain in rural areas, programs that encourage broad-based asset accumulation amongst the rural poor, such as land, livestock or equipment purchases, would also be important for increasing rural incomes and the quality of rural life in the future. The promotion of viable family farms, which tend to be more labor intensive than large- scale farming operations, would help absorb some of the labor surplus in rural areas. F I G U R E E . 4 Distribution of Total per Capita Monthly Income, 2001 (Q1-Q3), U.S. Dollars 16.0 14.0 12.0 10.0 households 8.0 of 6.0 cent 4.0 Per 2.0 0.0 6 11 17 23 29 34 40 46 51 57 63 68 74 80 86 91 97 103 108 114 120 Per capita total income per month Urban Rural Source: Author's calculations based on State Committee of Ukraine for Statistics Household Survey. xxvi Executive Summary Smaller farms also make more use of local services such as repair shops, input supply services, and marketing services. The Government has a well conceived program to transfer social assets from for- mer collective farms to local administrations, but has no clear strategy for manag- ing or financing these services from the budget. By January 2002, which is six years from the start of the program to transfer assets, 48% of kindergartens, 50% of housing, 54% of clubs, 58% of utility networks, and 64% of medical institutions, and 67% of schools had been formally transferred to local administrations. Many of these facilities are under-funded, run down, or abandoned and those that continue to operate are still being supported by farm enterprises because the state budgets for these activities are in- adequate. For example, in 2001, the State Budget earmarked only 55.2 million hryvnia for the maintenance of social assets in rural areas, which is far short of the funding lev- els required. The number of social service employees in rural areas declined by 33% between 1990 and 2000. By 2000, doctors were available in only 8% of rural settlements, and nurses in 56%. Medicines are seldom available and patients are generally required to pay the full cost for them. Kindergartens are only available in about 35% of rural set- tlements. School attendance numbers for rural schools have declined by 15-20%. The provision of utility services in rural areas has always been worse than in urban areas. For example in 2000, only 18% of houses and apartments in rural areas had running water, compared to 75% in urban areas (Figure E.5). The Government will need to increase budget allocations for services in rural areas in order to remove these functions from agricultural enterprises. The current config- uration for provision of health and education services may need to be rationalized to F I G U R E E . 5 Housing Amenities in Ukraine (2000) Natural Gas Central heating Running water Rural Urban Sewer system Hot water 0 10 20 30 40 50 60 70 80 90 Percent Source: Social and Economic Condition of Ukrainian Rural Settlements: Statistical Book.--State Committee of Ukraine for Statistics, 2001. Executive Summary xxvii provide these services more effectively. To achieve this, a comprehensive strategy for providing health care and education services in rural areas will be needed, keeping in mind that the rural population is likely to decline significantly over time. This may re- quire further concentration of medical facilities, and fewer higher quality schools. For those services for which there could be cost recovery, such as gas supply, water supply, and other utilities, a combination of block grants and increased tax revenues will allow village administrations to better develop and manage these utility services. Other ser- vices that were provided by agricultural enterprises, such as shops, barbers and repair facilities could be transferred to the private sector, and many of these functions prob- ably already have been transferred. The key role for government and local administra- tions in ensuring that these services are provided is to ensure a business environment that makes it possible for them operate cost effectively. C H A P T E R 1 Agricultural Sector Performance U kraine is endowed with rich natural resources (soil, climate, and water) that are highly suitable for agricultural use. The country has over 40 million hectares of agricultural land, of which about 80% (or 33 million hectares) is arable, and of this amount, more than 50% consists of deep black chernozem soils. For that reason alone, agriculture has the potential to become an important "driving force" for the Ukrain- ian economy. However, the agricultural sector2 went into a steep decline in the 1990s. The situation showed signs of changing in 2000 when, after ten years of disappointing performance, the Ukrainian agricultural sector output grew by 10% per year for two years in a row, then maintained these output levels in 2002 by growing 1.2%. Adverse weather conditions in 2003 resulted in a decline in agricultural GDP by an 18% (estimated). Role of Agriculture in the National Economy Agriculture is an important sector of the Ukrainian economy. It makes up a significant pro- portion of GDP, is a major employer and has the potential to be a significant export earner. During the transition, it has also served an important role as a social safety net by absorb- ing surplus labor into subsistence farming, and preventing a major social upheaval by slow- ing the pace of urban-rural migration seen in similar economic collapses. On the whole, however, Ukraine's agricultural potential is significantly underutilized (Table 1.1). Agricultural output The economic transition process has been difficult for the sector. Between 1990 and 1999, output of the primary agricultural sector3 in Ukraine declined by 51% before recovering slightly in 2000­2002. The share of the Gross Domestic Product (GDP) 2The agricultural sector is defined as primary agriculture, i.e., it does not include agribusiness. 3Gross agricultural output and agricultural contribution to GDP are different concepts. Gross agricultural output is a value of all commodities produced in agriculture, i.e., it includes the value of commodities, such as feedstuffs, that are produced and consumed in agriculture. Hence, calculation of gross agricultural output involves double counting of some commodities. Agricultural GDP gives a measure of net contribution of agriculture to national economy. 1 2 Achieving Ukraine's Agricultural Potential T A B L E 1 . 1 Comparison of Yields for Selected Commodities Maize Sunflower Wheat (ton/hectare) (ton/hectare) (ton/hectare) Milk (kg/cow) 1999 2002 1999 2002 1999 2002 1999 2002 EU (15) 9.1 9.1 1.5 1.6 5.7 5.8 5,738 6,105 US 8.3 8.1 1.4 1.2 2.9 2.4 8,061 8,431 Hungary 6.4 5.0 1.5 1.8 3.6 3.5 5,486 6,522 Poland 5.7 6.1 n/a n/a 3.5 3.8 3,954 4,406 Ukraine 2.5 3.8 0.9 1.2 2.3 3.0 2,361 2,828 Source: FAO F I G U R E 1 . 1 The Role of Agriculture in the National Economy 30 25 20 15 percent 10 5 0 1990 1995 1996 1997 1998 1999 2000 2001 2002 Share of agriculture in total employment Share of investment in agriculture in total investment Share of capital in agriculture total capital stock Share of agriculture in GDP Source: State Committee of Ukraine for Statistics produced in agriculture also decreased as the agriculture sector output declined faster than the decline in the overall economy. In 1990, at the beginning of the transition, agriculture accounted for 18.6 % of GDP. By 1999, the share of agriculture in GDP had fallen to 13.6%. With the agricultural output recovering in 2000­2002, its share of GDP increased to 14.6% in 2002 (Figure 1.1 and Table 1.2).4 4The quality of official statistical data deteriorated considerably during the years of transition. That may introduce some biases into the descriptive statistical analysis that follows. For example, according to various experts, substan- tial amount of the value of GDP (50% and higher) in Ukraine is not accounted for by official statistics due to tax evasion. According to Prime Minister of Ukraine Yanukovich, at least 20% of agricultural output is in the shadow economy (All-Ukrainian Meeting on Agriculture, February, 2003). The comparisons of agricultural output and GDP presented in Chapter 1 are warranted if the data reporting biases for GDP and agricultural output are of the same order of magnitude between time periods. Agricultural Sector Performance 3 T A B L E 1 . 2 Position of Agriculture in the National Economy 1995 1996 1997 1998 1999 2000 2001 2002 Share of agriculture in GDP [%] 14.9 13.3 13.9 13.7 13.5 16.3 16.3 15.3 Share of agriculture in total employment [%] 22.5 21.8 22.0 22.5 22.6 23.2 24.8 25.2 Share of investment in agriculture in [%] 8.1 7.8 7.0 5.0 4.6 3.6 5.0 5.2 total investment Gross agricultural output (GAO), nominal [hryvnia million] 16980 26746 30032 32758 37683 54259 65100 64380 Gross agricultural output, real* [hryvnia million] 67817 61349 60272 54468 50736 55690 61398 62106 Gross agricultural output, nominal** [US$ million] 11526 14623 16132 13373 9123 9974 12118 12086 Share of crop production in GAO [%] 56.7 57.0 61.6 56.5 54.4 60.4 61.6 59.9 Share of livestock production in GAO [%] 43.3 43.0 38.4 43.5 45.6 39.6 38.4 40.1 Share of private sector in GAO* [%] 44.9 51.5 52.5 55.8 56.8 62.0 58.7 59.8 Gross agricultural output, real* 1990=100 64.9 58.7 57.7 52.1 48.6 53.3 58.8 59.4 Gross agricultural output, 1990=100 49.4 39.3 37.8 31.8 29 27.9 33.5 32.9 agricultural enterprises, real Gross agricultural output, private farmers 1990=100 105.8 109.9 110.1 105.6 100.1 120 125.3 129.1 and households, real Trade balance for goods, overall economy [US$ million] -2356 -3293 -2896 -2038 -265 617 490 980 Agricultural import [US$ million] 1184 1448 898 1051 946 908 1126 1114 Agricultural export [US$ million] 2861 3049 1801 1379 1419 1377 1824 2389 Net agricultural export [US$ million] 1677 1601 903 328 473 469 698 1275 Share of food and agricultural raw materials [%] 21.8 21.2 12.7 10.9 12.3 9.4 11.2 13.3 (except textile) in total exports Share of food and agricultural raw materials [%] 7.6 8.2 5.2 7.2 8.0 6.5 7.1 6.6 (except textile) in total imports Source: State Committee of Ukraine for Statistics Notes: *farms of all categories; in comparative prices of 2000; hryvnia million **Calculations based on State Committee of Ukraine for Statistics gross output data and official exchange rate of NBU Agricultural employment In 2002, about 25% of the labor force in Ukraine depended on primary agriculture as the main source of income and employment. This is high when compared to the 15.3% share of national income (GDP) generated in primary agriculture, indicating that there is sur- plus labor in rural areas. This is largely a legacy of the Soviet full employment policies of the past and this share would be expected to decline over time. Formal employment in rural areas has already begun to decline as the sector adjusts to a new incentive structure. Between 1990 and 2000, formal positions in agricultural enterprises (former state and collective farms) and rural enterprises are estimated to have declined by 1.5 million, in so- cial services in rural areas by 33% or 0.4 million positions, in industrial employment in rural areas by 0.5 million positions, and another 0.4 million rural residents employed in urban areas lost their positions. The economically active population in rural areas has re- mained at about 7.8 million during this period, meaning that about 38% of them have lost formal positions. However, despite having lost a large number of formal positions during the transition period the share of the population engaged in agricultural employ- ment has increased slightly. This apparent anomaly is a refection of the importance of household plots in absorbing surplus labor into subsistence agriculture. Subsistence agri- culture has provided a critical social safety net in rural areas during the transition, but in the longer run excess labor in rural areas will result in downward pressure on wages, un- employment or underemployment, causing long term social problems. This is an issue that is addressed in more detail in Chapter 8 (Rural Livelihoods and Rural Poverty). 4 Achieving Ukraine's Agricultural Potential T A B L E 1 . 3 Agricultural Trade, 1992­2002 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Gross Agricultural Output; current 7,110 12,725 11,466 11,526 14,594 16,120 13,391 9,127 9,981 12,118 12,086 prices; million US$ Agro-food exports (US$ million) 743 723 1,628 2,861 3,049 1,801 1,379 1,419 1,377 1,824 2,389 Agro-food imports (US$ million) 1,011 978 546 1,184 1,448 898 1,051 946 908 1,126 1,114 Balance (US$ million) -268 -255 1,083 1,677 1,601 903 328 473 469 698 1,275 The coverage degree of imports 73 74 298 242 211 201 131 150 152 162 215 by exports (%) Share of agro-food trade in total trade: Exports (%) 10.0 9.2 15.8 21.8 21.2 12.7 10.9 12.3 9.4 11.2 13.3 Imports (%) 14.7 10.3 5.1 7.6 8.2 5.2 7.2 8.0 6.5 7.1 6.6 Ratio of agro-food exports to GAO, 10.5 5.7 14.2 24.8 20.9 11.2 10.3 15.5 13.8 15.1 19.8 percent Ratio of agro-food imports to GAO, 14.2 7.7 4.8 10.3 9.9 5.6 7.8 10.4 9.1 9.3 9.2 percent Share of net agro-food exports in GAO, -3.8 -2.0 9.4 14.5 11.0 5.6 2.4 5.2 4.7 5.8 10.5 percent Source: Author's calculations based on the State Committee of Ukraine for Statistics data and the FAO agro-food trade data for 1992 and 1993 (http://apps.fao.org). Agricultural trade During the 1990s, the importance of agricultural sector as an export revenue earner for Ukraine declined in both absolute and relative terms. The share of agriculture in total exports is considerably lower than other countries with similar agricultural export po- tential (Table 1.3). Relative to other countries with similar agricultural capacity, agri- cultural exports are low. For example, in 2000 the ratio of food exports to Gross Agricultural Output for Ukraine was 14% compared to 25% for Poland and 53% for France and Germany. Given Ukraine's agricultural resources, trade policy has critical importance for future agricultural growth. Changes in Input Use and Capital Investment Input use in agriculture declined sharply in the early 1990s and has remained extremely low by international standards. Fertilizer application rates in 2001 were about 30 kg/hectare and 38 kg/hectare in 2002 for wheat and corn, up slightly from the previ- ous three years, but still significantly lower than levels applied in other major wheat and maize producing regions of the world (Figure 1.2). Total gasoline and fuel use declined from 5.6 million tons in 1995 to 2 million tons in 2001 and 1.9 million tons in 2002, total fertilizer, (measured) by active ingredient, also declined from 900,000 tons to 401,000 tons in 2001 and 399,000 tons in 2002. This contraction in input use is the result of rel- ative input/output price ratios faced by farmers, the lack of available credit or cash flow at the farm level, and a reduction in government subsidies to primary agriculture. Investment in agriculture also declined sharply during the 1990s. This was partly due to the base levels of investment in the pre-reform years when Ukraine's agricultural sector enjoyed preferential treatment by central planners in terms of supply of invest- Agricultural Sector Performance 5 F I G U R E 1 . 2 Mineral Fertilizer Application Rates and Changes in Grain Yields 300 45 40 250 35 Winter and spring wheat - NPK 200 30 applied (kg/hectare) Corn - NPK applied (kg/hectare) 25 150 20 Wheat yields, 100 kg/hectare (right scale) 100 15 Corn yields, 100 kg/hectare (right scale) 10 50 5 0 0 1990 1997 1998 1999 2000 2001 2002 Source: State Committee of Ukraine for Statistics ment resources and working capital (Figure 1.1). However, the decline was made sharper and longer by the bad investment climate for agriculture during most of the 1990s (Fig- ure 1.1). The share of investment in primary agriculture of the total investment in the national economy declined from 21.3% in 1990 to 2.1% in 2002 (Table 1.2). Commodity Specific Performance Indicators The most significant change in agricultural output was the very sharp decline in live- stock production from about one-half to one-third of the total value of agricultural out- put. The main reason for this change was sharp decline in demand for animal products precipitated by a more than 60% drop in real per capita income in Ukraine between 1990 and 2000. Demand for animal products decreased significantly more than for other food products because of its higher income elasticity. Grain production also de- clined sharply as the demand for feed grain declined, and farmgate prices for grains fell to levels that caused producers to move to low input/low output production methods. Grain production recovered in 2000­2002 levels as a result of several factors discussed in more detail in Chapter 2. Sugarbeet production also declined as domestic sugar pro- duction adjusted to increased competition from imports. The production of potatoes, vegetables, and sunflower was relatively stable during the 1990s. Potatoes and vegeta- bles were being produced primarily by private farmers or on household plots using labor intensive methods of production. Sunflower production levels were driven by profitable export markets for the crop. Figure 1.3 shows the major trends in crop production vol- umes. More detailed information on commodity production is provided in Annex 1. Trends in Grain Trends in volume and structure of grain production Production and Between 1992 and 2000 grain production in Ukraine decreased by about one-third. In Marketing 2001, it rebounded almost to the record level of the 1993 crop harvest. The structure of grain production was remarkably stable: about 55% of grain produced was wheat, 25% 6 Achieving Ukraine's Agricultural Potential F I G U R E 1 . 3 Major Trends in Physical Volume of Crop Production (1000 tons) 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 Grains Sugarbeet Potatoes Vegetables Sunflower Fruits 1986-90 1991-95 2000 2001 2002 Source: State Committee of Ukraine for Statistics barley, and the rest was corn, rye, and oats. In the years of unfavorable weather condi- tions (such as 2000 and 2003), wheat production decreased more than production of other grain crops leading to a relative decrease in the share of wheat in total output. In years with good weather conditions, production of wheat increases dramatically. For ex- ample, in 2001 and 2002, wheat production more than doubled from 2000 levels. The individual private farm and household plot sector is playing an increasingly im- portant role in grain production (Table 1.4). They produced 20% of grain outputs in 2001 and 24% in 2002, up from about 3% in 1990. Prices for wheat are also highly variable as the prices change from export parity under good production conditions to import parity under bad production conditions. For example, domestic wheat prices changed from US$80 per ton in 1999, when there was an export surplus, to US$150 per ton in early 2000, which was a deficit year. By August 2001, a surplus year, wheat prices had declined again to US$95 per ton. These sharp swings are made worse by in- efficiencies in the grain marketing and storage system. Storage and elevator costs are at least 50% higher than in the U.S. and Canada, adding about US$7 per ton to the mar- keting margin above what could be expected from an efficient system. Margins are also T A B L E 1 . 4 Structure of Grain Production (million tons) 2002 as % Calendar Year 1990 1995 1997 1999 2000 2001 2002 of 1990 Total production 51.0 33.9 35.5 24.6 24.5 39.7 38.8 76.1 Farm enterprises 49.6 31.2 32.1 21.6 20.0 31.7 2.5 59.5 Individual private farms and household plots 1.4 2.7 3.3 2.960 4.5 8.046 9.3 644.9 Share of private farms and household plots (%) 2.8 8.1 9.5 12.0 18.4 20.3 24.0 Source: State Committee of Ukraine for Statistics Agricultural Sector Performance 7 higher as a result of the high risk of ad hoc Government interventions in deficit years and high levels of business risk. High marketing margins result in lower farmgate prices. Main trends in grain marketing Less than half of the grain produced in Ukraine is usually marketed, the rest being con- sumed directly on the farm (Table 1.5). The role of different marketing channels changed significantly over time. Government procurement agencies are no longer the major players on the market. The role of farmers markets increased steadily: in 2000, more than 35% of grain was sold there. Another 35% was delivered to the workers of farm enterprises as in-kind wage payment. The rest was barter transactions, which mostly consisted of payments for inputs that have been supplied to farm enterprises in exchange for a promise to pay back in grain. In 2001, however, the structure of mar- keting channels changed considerably. A class of new market operators, (domestic and foreign private traders, input suppliers and owners (managers) of newly reformed farm enterprises), controlled almost 38% of the grain market. Their primary interest is to market grain for export. The share of grain marketed to workers declined from 35% to 29% between 2000 and 2001 and again to 24% in 2002. Sales through farmers mar- kets increased from 35% to 38% between 2000 and 2001 and declined again to 16% in 2002. Barter deals declined from 25% to 13% of the market from 2000 to 2001 and again to 7% in 2002. These are all positive signs of a maturing market. Grain balances The total volume of grain available from carryover stocks, production and imports has diminished by more than one half in 1990 (Table 1.6 ). However, the utilization of grain resources has become more efficient and productive, with smaller losses. Utiliza- tion of grain for processing, seeds, and forage has also reduced substantially as a result of an adjustment in demand and decreases in meat production. Reduced domestic con- sumption, particularly for animal feed use, has resulted in increased focus on exports. In 2001, Ukraine exported 11% of available grain. This increased to 21% of available T A B L E 1 . 5 Grain Marketed by Market Participants Calendar Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Production (million tons) 38.7 38.5 45.6 35.5 33.9 24.6 35.5 26.5 24.6 24.5 39.7 38.8 Marketed (million tons) 17.177 17.0 20.4 15.6 13.1 12.6 17.1 14.5 13.7 10.7 17.0 19.0 Percent marketed (%) 44.2 44.1 44.7 44.0 38.6 51.3 48.2 55.0 55.8 43.9 42.7 48.9 Structure of sales (%) Procurement agency 65.4 64.1 67.2 63.1 37.5 35.8 25.7 15.0 10.7 4.0 2.2 2.4 Farmers markets, retail trade 9.6 8.7 8.8 9.6 19.1 20.0 20.0 23.1 25.3 34.8 17.7 16.1 Payment to shareholders 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 14.1 12.8 12.5 Population 23.6 26.6 23.4 25.2 30.3 25.9 25.5 28.4 30.2 20.6 16.1 11.4 (payments in kind, public catering) Other 1.3 0.6 0.6 2.1 13.1 18.4 28.8 33.5 33.9 40.5 64.0 70.1 Barter 0.4 0.6 0.6 2.1 12.8 18.1 28.8 33.3 33.7 25.4 11.9 6.8 Source: State Committee of Ukraine for Statistics 8 Achieving Ukraine's Agricultural Potential T A B L E 1 . 6 Grain Balance (million tons) 1994 1995 1996 1997 1998 1999 2000 2001 2002 Opening Stocks 24.6 22.0 21.3 15.0 20.6 16.0 11.3 12.7 19.8 Production 35.5 33.9 24.6 35.5 26.5 24.6 24.5 39.7 38.8 Imports 0.2 0.2 0.2 0.1 0.1 0.1 1.0 0.4 0.2 Total Supply 60.3 56.2 46.0 50.6 47.2 40.7 36.8 52.8 58.7 Seeds 0.5 4.6 4.1 4.0 3.8 3.6 3.6 4.1 3.9 Food use 9.3 8.9 8.4 8.6 8.5 7.6 7.7 8.4 8.4 Feed use 22.1 18.5 14.9 13.7 13.7 11.3 11.1 14.0 15.7 Food Processing 0.6 0.9 0.8 1.1 0.2 0.1 0.1 0.4 0.9 Total Domestic Demand 32.5 32.9 28.3 27.3 26.1 22.5 22.5 26.8 28.9 Exports 0.1 0.8 2.1 1.8 4.2 6.4 1.3 5.6 12.3 Losses 1.4 1.2 0.6 0.9 0.8 0.5 0.3 0.7 0.6 Total Demand 34.0 34.9 31.0 30.0 31.1 29.4 24.1 33.1 41.7 Closing Stocks 22.0 21.3 15.0 20.6 16.1 11.3 12.7 19.8 17.0 Changes in stocks -2.6 -0.8 -6.2 5.6 -4.5 -4.7 1.3 7.1 -2.8 Source: State Committee of Ukraine for Statistics grain in 2002. Ukraine is making significant progress in increasing its grain export fa- cilities. In 2002, the Ukrainian commercial seaports substantially increased their grain transloading and storage capacities. The aggregate export capacity of the Ukrainian ports reached 12 million tons of grain in 2002, which was 71% higher than the figure registered in 2001. Ilyichevsk Port increased its transloading capacity to 5.2 million tons of grain a year and Odessa to 2.6 million. tons. New facilities also are being built in Nikolaev, Kherson and other ports. Marketing costs are still relatively high and can reach 15­20% of farmgate price, reducing Ukraine's export competitiveness.5 A major limiting factor in reducing export competitiveness is the current value-added tax policy of the government which requires the payment of VAT at the time of purchase, with the promise that it would be returned by the Government at the time of export. The reality is that it is usually not returned in time, if at all. Trends in the Trends in volume and structure of sunflower production Sunflower Production Sunflower was the only large-scale field crop that experienced increases in production and Marketing during the 1990s. Production levels of sunflower in the 1990s were in general higher than during the pre-reform era. Producers expanded the area under the crop substan- tially, driven by increased profitability and a reliable export market where sales could be safely bartered for imported input supplies (Table 1.7). Table 1.8 shows the profitability of sunflower production and explains why pro- ducers have maintained sunflower output levels while the output of other crops has declined. The crop was highly profitable through the 1990s. By 1997, more than 1 million tons or almost half of produced sunflower was ex- ported. In 1999, a 23% sunflower export tariff was introduced on the premise that it would increase the capacity utilization of domestic crushing facilities and increase ex- port earning by exporting more sunflower oil products.6 The tariff had the expected ef- 5APK-Inform. Agricultural Sector Performance 9 T A B L E 1 . 7 Productivity Indicators for Sunflowers 1991­95 1998 1999 2000 2001 2002 Planted land, 1000 hectare 1,601 2,531 2,889 2,943 2,502 2,834 Harvested land, 1000 hectare 1,585 2,431 2,800 2,842 2,396 2,720 Yield ton/hectare harvested land 1.46 0.93 1.00 1.22 0.94 1.2 Production, 1000 ton 2,311 2,266 2,794 3,457 2,251 3,271 Source: State Committee of Ukraine for Statistics T A B L E 1 . 8 Profitability of Sunflower Production 1990 1996 1997 1998 1999 2000 2001 2002 Sunflower price (US$/ton) 670.7 144.9 142.1 131.0 122.9 96.1 145.8 158.4 Sunflower profit (US$/hectare) 745.3 53.2 26.6 22.0 43.3 40.1 55.8 83.4 Source: State Committee of Ukraine for Statistics T A B L E 1 . 9 Major Indicators of Sunflower Sector 1990 1996 1997 1998 1999 2000 2001 2002 Planted acreage (1000 hectares) 1,601 2,107 2,065 2,531 2,889 2,943 2,502 2,834 Sunflower production (1000 tons) 2,571 2,123 2,308 2,266 2,794 3,457 2,251 3,271 Sunflower export (1000 tons) 105 861 1074 908 433 834 584 68 Export as % of sunflower output 4 41 47 40 15 24 26 2 Sunflower oil production (1000 tons) 1,070 705 510 511 577 973 935 980 Sunflower oil export (1000 tons) 488 271 186 198 174 582 473 566 Export as % of sunflower oil production 47 39 37 40 32 62 54 58 Source: State Committee of Ukraine for Statistics fect. Domestic sunflower oil production increased in 2000, to the same level as 1990, and exports of sunflower oil did increase. However, sunflower exports declined by 50% in the same year offsetting the increases in sunflower oil exports. The combined export revenues from sunflower seed, sunflower oil and sunflower meal exports have not in- creased since the introduction of the tariff in 1999. Some exporters found a way to avoid paying the export tariff by using so-called "tolling schemes" where sunflower seeds are supplied to a foreign entity in exchange for oil that is produced from the raw material. The scheme allowed exporters to overcome adverse effects of the tariff. In 2001, the level of export tariff was reduced by the Government from 23 to 17%, but at the same time "tolling schemes" were prohibited. Producers reacted to the policy change by re- ducing the area under sunflower production in 2001. Changes in sunflower oil for do- mestic consumption and export are indicated in Table 1.9. 6The capacity of domestic crushing capacities (including large-scale plants recently built by Cargill and Chumak, Swedish subsidiary) is estimated at 3.7 million tons, when the maximum sunflower crop was 2.8 million tons. That means that about a million tons of oil crushing capacity is obsolete. Source: USDA. Ukraine. Oilseeds and Products. Annual 2001, GAIN Report No UP1010. 10 Achieving Ukraine's Agricultural Potential Trends in the The per capita consumption of sugar declined from 50 kg in 1990 to 30 kg in 1997. Sugarbeet and Sugar It rebounded to 36 kg by 2002, but the domestic demand still remains very low and Production and is not expected to become the major driving force for the sector. It is unlikely that sugar Marketing exports from domestically grown beets will increase on a sustainable basis given the high cost nature of sugarbeet production and inefficient processing facilities. Sugarbeet production was unprofitable through most of the 1990s. As a result, the production of sugarbeets contracted by 67.4% or 29.8 million tons between 1990 and 2002, both because of declines in harvested area (-52.5%) and lower yields (-31.3%). Yields have stabilized at a low level of about 18 tons of beet per hectare. The total number of sugar processing plants in Ukraine is 192. These plants are capable of processing up to 50 mil- lion tons of sugarbeet. The excess capacity is very large, given that the favorable sug- arbeet crop in 2001 was about 15 million tons. It is likely that the processing sector will contract significantly in the coming years with only the more efficient processing plants surviving. The current sugar balance is indicated in Table 1.10. T A B L E 1 . 1 0 Sugar Balance, thousand tons 2000/2001 2001/2002 2002/2003 Total supply 2025 2185 2175 Opening stocks 20 57 125 Production, total 1780 1830 1770 Production, from sugar beets 1552 1650 1430 Production, from imported raw sugar 228 180 340 Refined sugar imports 125 48 80 Illegal sugar imports 100 250 200 Total demand 1968 2060 2120 Human consumption 1540 1580 1560 Non-food use 400 400 400 Exports 8 80 140 Losses 20 20 20 Closing stocks 57 125 55 Source: State Committee of Ukraine for Statistics; Authors' calculations Trends in Potato and Potatoes and vegetables are almost exclusively produced by the household sector. In Vegetable Production 2000, 98.6% of the total potato crop and 80% of the vegetable crop was produced on and Marketing household plots. Production levels of these commodities have been stable, and even increasing slightly during the 1990s. The sown area for potatoes is between 1.5 and 1.6 million hectares. Average total annual production of potatoes for Ukraine is be- tween 10­12 million tons, of which 6­7 million tons are consumed as food and 4­5 million tons are used as seed. Most potatoes and vegetables are consumed by the house- holds that produce them, with the surplus being sold in local markets. Trends in Meat Throughout the transition period, meat sector in Ukraine has undergone a long and Production and painful adjustment. Reduced demand for meat as a result of the reduced purchasing Marketing power of the population, resulted in a decline in the total value of meat products pro- duced by 65% between 1990 and 2000. During this period, the production of animal Agricultural Sector Performance 11 products, with the exception of eggs and poultry remained unprofitable. During this period of decline, meat production also shifted in favor of pork and away from beef and mutton. In 2001, meat production experienced its first turnaround in a decade. The gross value of animal production increased by 5.3% in 2001 and again by 5.6% in 2002, mainly as a result of increased prices. Meat production makes up about 20% of agricultural output (CASE 2002). Animal efficiency indicators in the individual private farm and household sectors are still much higher than in farm enterprises. For example, the weight gains of cattle in the household sector are in the range of 580­750 grams per day, compared to only 318 grams a day in farm enterprises. In hog production, the weight gains are 320­380 grams a day in individual private farm and household sectors compared to 173 grams a day in farm enterprises. According to the Ukrainian Institute of Agrarian Economics, in order to reach a breakeven point in profits, average weight gains should be at least 400 grams per day in cattle production and about 200 grams per day in pork production. As of today, the daily gains in agricultural enterprises are still 2 to 2.4 times lower than the mini- mum level of efficiency that is needed for them to become profitable. According to official statistics, the household sector marketed 34% of total meat and meat products they produced in 2002. The household sector sold about 40% of produce to processing and purchasing enterprises. Trends in Milk Milk production increased by 6% in 2001 and by 5% in 2002 after 10 years of de- Production and cline. The major factors in this output increase were a higher level of animal produc- Marketing tivity and a slower rate of decrease in cow numbers. The household plot sector played a major role in the recent stabilization of milk production. Cow numbers in the house- hold sector increased by about 4% in 2001 and 2% in 2002, while in farm enterprises cow numbers decreased by 25% in 2000, 9% in 2001 and 16% in 2002. As a result, the share of total cow numbers owned by the household sector increased from about half to almost two-thirds of total between 2000 and 2002. The household sector in- creased its share of total milk production from 65% to 75% during that period. The fact that during this period the share of household plot in milk production was higher than its share in cow numbers indicate that cow productivity in private sector was higher than in the farm enterprise sector. The consumption of milk in Ukraine increased by 4% in 2001 and 8.8% in 2002. Milk is considered to be the cheapest source of animal protein among the alternatives (meat, fish, poultry, eggs). For that reason, the demand for milk usually picks up first as consumers are trying to use their additional income to improve the quality of their diets. However, the profitability of milk production is still plagued by overproduction and in some cases local monopsony power of milk processors, causing downward pres- sure on prices. After growing in nominal terms by 12.7% in 2001, milk prices decreased by 10% in 2002. Milk production costs increased by only 7% in 2001 and by 1.5% in 2002. The average profitability of milk production improved from a net loss of 37% in 1999 to almost break-even point in 2001, before declining to a net loss of 13.8% in 2002. Low milk prices are also reflected in the negative PSE measures for milk recorded in Chapter 5 of this study. 12 Achieving Ukraine's Agricultural Potential Milk produced in household sector is mostly consumed within the household, but households do sell about 35% of their production (according to official statistics for 2002). The household sector sold more than 55% of milk sold to processing and pur- chasing enterprises. Data show that large farm enterprises increased the share of milk that is marketed from 69% in 1999 to 73% in 2002. The remaining 27% is used on the agricultural enterprise. Barter does not play an important role in milk marketing anymore. All of the alternative channels of the milk market are fairly well integrated. The difference in prices paid to producers is within a range of 10% of the average. Most of these price variations could probably be explained by the differences in milk quality. The domestic consumption of milk and milk products is not expected to increase substantially in the near future. This means that in the short run, Ukrainian milk pro- ducers can expect downward pressure on milk prices. They will need to make the neces- sary adjustments in quality in order to increase exports or reduce production to levels where domestic prices are reasonable. Milk product exports doubled between in 2000 and 2001 and increased by 49% in 2002, but still constitute less than 2% of the domestic milk supply. The major exports items in 2002 were dry milk (41% of total milk prod- uct export), butter (13%) and cheese (43%). Major importers were Russia, Lithuania, Poland, and the Netherlands. C H A P T E R 2 Agricultural Policy Framework W ith the dissolution of the Soviet Union and the breakdown of all previ- ously established production and trading practices, Ukraine was forced to confront the demands of transformation to a market-based economy. In the food and agriculture sector the adjustment needed was considerable due to the legacy of distorted prices, built in inefficiencies of collectivized agriculture, government interventions in the production system, and monopolistic input and output marketing. Ukraine has made significant progress in transforming its food and agriculture system, but the task is still not complete. The 12 years of reform have been characterized by a constant struggle between reformist and conservative forces in the sector. As a result, true structural reforms in the sector only began to occur in the late 1990s. Ukraine's ex- perience yields useful lessons for the future policy agenda. This chapter reviews the lessons learned from the economic transition process, the sequencing of reforms carried out thus far, the results of these reforms on agricultural output, and recommendations for a medium term policy agenda. It addresses policy issues in the areas of production, trade, domestic support, land reform, agribusiness pri- vatization, rural incomes and poverty, and rural infrastructure. Lessons Learned from the Ukrainian Experience 1990­2003 Lesson 1: Partial reforms are not sufficient to stimulate agriculture growth and productivity The primary cause of the initial decline in Ukrainian agricultural output and produc- tivity was the collapse of the Ukrainian economy and traditional export markets for agri- cultural outputs combined with an unstable macroeconomic situation in the early 1990s. However, the recession in the sector was made deeper and longer by slow and partial reforms in some areas of the agricultural policy. Virtually all transition economies of Central and Eastern Europe (CEE) and the former Soviet Union (FSU) experienced declines in agricultural output in the initial years of the transition, but the drop in agri- cultural production in the first five years of transition in Ukraine (1992­97) was much 13 14 Achieving Ukraine's Agricultural Potential sharper than, for example, in CEE countries (Macours et al, 1999). Moreover, in most CEE countries, the initial recession in agriculture was followed by economic growth after about five years, while in Ukraine the decline in agricultural output continued until 2000. There is no single optimal path of policy and institutional changes during an eco- nomic transition, but partial reforms in trade and marketing,--without concurrent re- forms in land policy, farm restructuring, agribusiness privatization, credit markets, and government administrative interventions in markets--did nothing to improve the prof- itability of agricultural enterprises. For this reason, some of the trade and price liberal- ization policies of the early 1990s were reversed in the mid-1990s under political pressure from producers. It was only in 1999 when the macroeconomic situation sta- bilized and a more comprehensive package of reforms in the area of agribusiness priva- tization and collective farm restructuring began to take effect, that terms of trade improved and large farm enterprises began to return to profitability. Lesson 2: Ad hoc direct government participation in markets is detrimental to agriculture sector performance Direct Government participation in agricultural input supply and grain purchasing, particularly in the period from 1995 to 1999 under the commodity credit program, had extremely bad consequences for the performance of the agricultural sector. The Gov- ernment's active commercial involvement in providing commodity credits to the sec- tor resulted in making ad hoc government interventions in markets and frequent changes in policy to favor its own credit and input supply activities. In order to enforce grain supply agreements, restrictions were often imposed on movements of grain, and in some cases grain owned by private sector companies was confiscated. This signifi- cantly increased the risk faced by private input suppliers, marketing agents, and agri- cultural producers. This risk was translated into reduced private sector input supplies and higher risk margins demanded by these input suppliers and other market agents. As a result, private sector input supply declined by about 80% between 1995 and 1996, when the commodity credit program was first implemented. It was not until the gov- ernment ceased direct participation in input supply markets in 1999 that the private sector input supply increased again, the banking system began to provide credit to the agriculture sector, and the agricultural sector once again began to grow. Government ad hoc interventions in grain exports and grain trade in 2003 had the same adverse ef- fects on agricultural growth as earlier ad hoc government interventions by increasing the risk faced by input suppliers and grain marketing companies. Lesson 3: Private sector development does work Privatization of agribusiness companies and the establishment of private farming com- panies which rent the land of former collective farms have improved the efficiency of the input supply chain, primary agricultural production, and the marketing chain for agricultural products. There is clear evidence that allowing farm managers to make in- dependent decisions on the selection of crops and production methods has resulted in better efficiency in allocation of resources, reduced costs and improved profits. While this transformation is not complete and much inefficiency still remains, there is clear evidence that the privatization policies pursued by the Government during the transi- Agricultural Policy Framework 15 tion are beginning to yield results. In 2001, improvements in profitability of primary agriculture were achieved mostly due to changes in the structure of production in favor of more profitable commodities. Marketing margins in the agribusiness sector have also been declining, particularly for farm to export chains, indicating increased efficiency in this sub-sector. Lesson 4: Continued government bias in favor of the large farm sector will delay reform The Government's short-term strategy to stimulate growth in the agricultural sector through subsidized credits, investment, tax breaks and debt write-offs, may have de- layed the long-term objective of improving agricultural efficiency. By providing mas- sive allocations of resources in favor of agricultural enterprises, the Government has perpetuated the existence of many inefficient agricultural enterprises. By contrast, some of the most efficient producers, individual private farmers, received almost no govern- ment support at all. The Government can encourage efficiency gains in the agricultural sector by enforcing hard budget constraints equally for farm enterprises and individual farm operations, thus forcing less efficient producers into liquidation and allowing more efficient producers to acquire their assets. Unless structural inefficiencies in the large- scale farming sector are addressed there will continue to be political pressure on the Government from less efficient producers for financial support and protectionist poli- cies. Continuing policies that support the inefficient producers, as was the case in the 1990s, will delay reforms and perpetuate inefficiencies in the overall agricultural system. Lesson 5: Ukraine needs a broader rural agenda The Government's current policy in the rural sector is preoccupied with stimulating agricultural production, while paying insufficient attention to the broader rural devel- opment agenda. In the next phase of policy reform, the Government will need to ad- dress the social impacts of agricultural transition on rural communities. Ukraine has a large amount of surplus labor in rural areas and this is likely to increase as primary agri- culture becomes more efficient. While the household plot (subsistence) sector has been able to absorb some of this surplus labor and prevent a major social upheaval, this is not a long-term solution. Social services in rural areas have also been deteriorating. In the longer run, the biggest political risk to the sustainability of the agricultural and reform process is that it does not yield tangible economic benefits for the rural population. The Government therefore has an important role to play in reshaping rural communities. In order to do so, the Government will need to continue to reduce direct support to agricultural producers, and provide increased budget support to improving rural ser- vices and stimulating non-agricultural job creation. Summary of Policy Reforms and Policy Environment Specific agricultural policy issues are addressed in detail in Chapters 3 to 9 of this re- port. This section provides an overview of these policies, the sequence in which they were implemented, their relative importance in the reform process, and their effect on agricultural sector performance. 16 Achieving Ukraine's Agricultural Potential The Macroeconomic Overall economic decline and macroeconomic instability in the 1990s made recovery Environment of agricultural growth difficult, prompting the Government to intervene in an effort to overcome short-term crises. A dramatic fall in real per capita domestic incomes caused a decline in the consumption of agricultural products, particularly higher value products such as meat and milk. Ukraine lost traditional food export markets in the former Soviet Union due to declines in incomes in those countries and disintegration of the centrally planned food supply system. A period of hyperinflation between 1991 and 1995, which reached a peak of 10,250% per annum in 1993 but was still 250% per annum in 1995 caused a very rapid deterioration in the terms of trade between out- put and input prices for agricultural producers. The real exchange rate of the Ukrain- ian currencies (Karbovanets and hryvnia) depreciated rapidly between 1991 and 1994, followed by appreciation between 1995 and 1998, against most major currencies. Be- tween the third quarter of 1998 and the first quarter of 2001, the real exchange rate depreciated 30% against major currencies as a result of the financial crisis in Russia. Since then, the currency has stabilized with a gradual appreciation.7 Many of the agri- cultural policies of the 1990s were a reaction to these difficult macroeconomic condi- tions, seeking to solve short-term crises resulting from macroeconomic shocks rather than trying to address longer term structural changes in the sector. The resumption of macroeconomic stability since 1999 helped the recovery of the sector. From 1999 onwards, the economies of Ukraine and its major trading partner, Russia began to grow. Ukraine's per capita income increased by 10% in 2000 and an additional 13% in 2001 which translated into a 6% to 8% increase per annum in the domestic demand for food. Inflation was reduced to manageable levels and the exchange rate for the hryvnia was stable. Relatively stable exchange rates and increasing domestic farm prices resulted in improved terms of trade between agricultural inputs and out- puts, as well as increased demand for export products. Trade Policies Export policies in the early 1990s were characterized by export quotas tariffs and li- censes restricting export. By the mid-1990s most export restrictions on trade had been abandoned apart from export tariffs on live animals and skins, which were introduced in 1996, and on sunflower seeds, flax seeds, and false flax seeds which were imposed in 1999. Import policies for agricultural products, on the other hand, were character- ized by a relatively moderate ad valorem tax rates in the range of 10­30% for the pe- riod 1992­1993. This was followed by strong increases in import duties between 1993 and 1999. Statutory tariffs increased sharply between 1997 and 1999 followed by a period of stabilization in 2000 and 2001. The specific duties in ad valorem terms for sunflower, sugar and poultry were all above 100% in 2001. Even wheat had an import tariff rate of 44%. Ukraine also applies a number of non-tariff barriers, including quo- tas licenses and import bans which quite often lack transparency and are expensive by international norms. The State Committee for Standardization of Ukraine imposes numerous (often unnecessary) technical standards and certification requirements on many imports. The Committee also fails to recognize foreign product certificates even if issued in accordance with international standards. 7Zorya, 2003, based on NBU data. Agricultural Policy Framework 17 The net effect of the current trade regime has been positive for agricultural exports, with the exception of sunflower seeds, where export tariffs distort domestic prices and suppressed exports of raw seed. The import regime is less favorable, causing some dis- tortions that negatively impact the agricultural sector. Firstly, high transactions costs associated with inspections and licensing, when combined with high import tariffs, in- crease the cost of many inputs used in agriculture. Secondly, high import tariffs also cause large changes in domestic prices when changing from a net export situation to a net import situation and prices move from export parity to import parity (Chapter 4). Domestic Support The price liberalization program announced in 1991 was to a large extent negated by Policies strong administrative controls and pervasive government procurement between 1991 to 1995. Combined with unfavorable macroeconomic framework, these policies im- posed a heavy implicit tax on agriculture, while partially compensating for this implicit taxation through large budget transfers to agricultural enterprises. These budgetary transfers were not fiscally sustainable and had to be cut as part of the overall macro- economic stabilization program in 1996. At that time the Government introduced a "state commodity program" which provided input credit in kind to agricultural en- terprises in exchange for state grain procurement contracts. Private sector input sup- ply and grain marketing activity declined sharply as a result, leading to further declines in agricultural output. Poor collection rates for the state commodity credit program and declining output ultimately led to the abandonment of the program in 1999, and a debt write-off (5.4 billion and 0.8 billion hryvnia in 2000 and 2001, respectively). The Government has substantially reduced direct budget transfers but continues to provide implicit subsidies to agriculture. The single tax policy for agriculture lowered the tax liability for agricultural enterprises by an estimated 1.4 billion hryvnia per year in 2001 and 2002. While the overall market price support for agriculture is now at rel- atively low levels, it disguises the variations across commodities. High PSE levels for poultry (35%), pigmeat (33%), eggs (21%) and sugar (30%) indicate that they are heav- ily supported, while milk (-25%) and sunflower are discriminated against. This is largely the result of persistent price distortions in these sectors arising from Government policies, but also infrastructural and institutional weaknesses of Ukrainian agricultural markets such as local milk monopsonies. The Government will need to adopt policies reducing market price distortions, particularly in these specific sectors. Land Reform and The program to restructure collective farms began in 1994, but it was not until the Farm Restructuring passage of the Presidential Decree of December 3, 1999 on restructuring of large-scale farms that the real restructuring of collective farms began. Earlier attempts to restruc- ture these entities had largely been changes in the names of these institutions. This de- cree provided impetus to the restructuring of collective farm enterprises, including the dissolution of collective farms as legal entities, the distribution of land into private ownership, the promotion of land rental and the imposition of hard budget constraints on newly formed agricultural enterprises. Agricultural credit is still a major constraint for the development of the primary agri- cultural sector. For example in 2001, primary agriculture sector received about 2.2 bil- lion hryvnias in credit with an average maturity of 6 months. Only about 15% of the 18 Achieving Ukraine's Agricultural Potential loans outstanding had a maturity of more than 1 year. Real lending rates were 21.6% (with nominal interest rates of 29%). About half of this credit was provided under an interest rate subsidy program at a rate of 13.7% (Zorya 2003). The situation has re- mained almost the same in 2002 and 2003. While this is a significant improvement over the credit situation in the mid-1990s when there was almost no commercial credit avail- able for primary agriculture, Ukrainian farmers remain at a competitive disadvantage to farmers in other major agricultural producing countries. The major reasons for lack of credit for agriculture are: high commercial risks, unpredictable government policies, and a weak legal, institutional and enforcement environment. This includes: i) the in- ability to use land and other fixed assets as collateral because property rights are not reg- istered in a secure registry system and that there is a moratorium on the sale of agricultural land; and ii) there are limits on the use of movable assets because the mov- able collateral registry system is not well developed, contract enforcement is difficult, resale markets are thin, and secured lenders are not fully protected against third party claims (Chapter 6). Agribusiness The agribusiness privatization program which began in 1995, had made significant Privatization progress by 1999, with most agribusiness companies being at least partially privatized. As a result, the productivity of the food processing industry has begun to improve, marketing chains are becoming more efficient, and Ukrainian food processors have re- captured a significant share of the domestic food market. Efficiency levels are still well short of internationally competitive levels. For example, as a result of inefficiencies in the export marketing chain, Ukrainian farmers received only 40% of FOB from the export of grain, while German farmers received 70% of the FOB price in 1999. This inefficiency resulted in wheat producers loosing US$23 per ton in 1999 (Zorya, 2003). However, efficiency in agribusiness marketing and processing are expected to continue improving with increased levels of investment, more competition, and an improved legal framework and business environment (Chapter 7). Agriculture Sector Response to the Policy Environment Agricultural output declined between 1990 and 1999, but began to recover after 2000. Yields declined and labor productivity remained low. The decline in agricultural out- put in the 1990s was the inevitable adjustment8 to severe distortions and inefficiencies inherited from the past, but the severity and length of the decline could have been re- duced by more rapid and consistent economic reforms. The deteriorating macroeconomic situation in the early 1990s was a major factor in the initial decline of agricultural output. Both export and domestic demand for Ukrainian agricultural products collapsed because of deteriorating macroeconomic con- ditions in Ukraine and in the region, and the collapse of the centrally planned trading system. This exerted downward pressure on agricultural output prices. 8USDA (1996). Former USSR. Situation and Outlook Series, Economic Research Service, May 1996. Kwiecin- ski, A. (1998) The slow transformation of Russian agriculture. The OECD Observer, No. 214, October/ November 1998. FAO (1997). The State of Food and Agriculture 1997. FAO Agriculture Series No. 30, FAO, Rome. Agricultural Policy Framework 19 Ukraine, like most CEE and CIS countries, previously supported agriculture with heavy subsidies, typically setting artificially low prices for inputs and relatively high prices for outputs. Price liberalization corrected some of these distortions, causing sub- stantive declines in agricultural terms of trade. The domestic support program for agriculture that relied heavily on administrative controls and the use of state owned enterprises perpetuated many of the inefficiencies of the centrally planned input and output marketing systems. Ad hoc government interven- tions in these marketing systems also increased the risk for private sector credit institu- tions, and input supply and marketing entities, who translated this risk into lower participation rates and higher interest rates and marketing margins. The lack of progress on agribusiness privatization perpetuated inefficiencies in agricultural marketing and input supply. These factors contributed further to the declining terms of trade for agriculture. In summary, a combination of a deteriorating macroeconomic climate, inefficient domestic support policies and the lack of progress on agribusiness privatization resulted in sharp decreases in agricultural output prices relative to input prices. The relative price of outputs to inputs declined by about 80% between 1990 and 1999.9 Low profitabil- ity of agriculture, and the lack of appropriate property rights and credit legislation re- stricted the availability of credit for agriculture. The slow pace of land reform and farm restructuring also made matters worse, as collective farm managers had little incentive to restructure their operations. This caused producers to adopt low input/low output production methods, resulting in lower yields and lower overall output. Agriculture sector performance recovered in the period 2000­2002 registering a 10% growth in agricultural output in both 2000 and 2001, and 1.2% in 2002. The in- crease can be attributed to a large number of converging factors that improved the con- ditions for the agriculture sector. The macroeconomic environment in both Ukraine and Russia improved, bringing with it increases in per capita incomes, and increased demand for agricultural products. Weather also played a favorable role in increasing yields. However, other structural changes enabled the sector to take advantage of these improving market conditions. By 1999, trade policies had improved significantly, par- ticularly for exports, improving the competitiveness of Ukrainian agricultural products. The Government had also significantly reduced its role in agricultural input supply and grain marketing, reducing the inherent inefficiencies of government controlled input supply and marketing systems. The agribusiness privatization program that began in 1994 and was largely completed by 1999 began to yield results in terms of increased ef- ficiencies in marketing and input supply chains. The land reform and farm restructuring program picked up momentum in 1999, improving the incentive structure for farm managers. For the first time in many years the index of real agricultural output prices (relative to agricultural input prices) in Ukraine increased by 18% in 2000. While these structural changes provided the basis for an economic recovery in 2000, many of these 9Farm Debt Study. A Multi-Country Study of the Major Causes and Proposed Solutions. World Bank Discussion Paper No. 424, The World Bank, Washington, D.C., 2001. Real prices are measured in terms of changes in terms of trade, i.e., as changes in index of prices received by agricultural producers to prices paid by agricultural producers for purchased inputs. In 1990­1999 that index dropped from 1 to 0.2. 20 Achieving Ukraine's Agricultural Potential reforms are far from complete, and there are still significant efficiency gains that are nec- essary before the agricultural sector in Ukraine to achieve its full potential. There were also some policy decisions in 2000 and 2001 that benefited the agri- cultural sector in the short run, but which may not be sustainable or desirable in the long run. For example, the large government debt write offs and restructuring of for- mer collective farms, high import tariffs for agricultural products and the current taxa- tion system for agriculture helped to boost agricultural output in the short run. The taxation and debt write-off and restructuring policies have tended to favor agricultural enterprises (large farms), and particularly the less efficient farms within this group, per- petuating existing inefficiencies in the agricultural production system. The household sector, which produces 60% of total agricultural output, was almost completely ne- glected. The tax policy for agriculture is not fiscally sustainable for the Government and the large-scale debt write-off cannot and, for budgetary reasons, should not be repeated as part of the Government's agricultural policy. This analysis of the turnaround in agriculture between 2000 and 2002 shows that there are some positive trends in the underlying factors that brought about growth. These include increased consumer demand, improved credit and cash availability on farms, reduced debt, and improved input supply. All these could be indicators of long- term improvement in the sector. However, there are also many factors that are one-time events or temporary phenomena, such as the exceptionally good weather in 2001, the debt write off for former collective farms, substantial tax breaks for agriculture, and a rapid depreciation in the national currency, which could mean that the current recov- ery is still fragile. It would be unwise for agricultural policy makers in Ukraine to de- duce from this brief turnaround in agricultural output that the task of reforming agriculture is over. Input levels, investment in primary agriculture, yields and produc- tivity remain low by international standards indicating that there is still room for fur- ther improvement. While good progress has been made in some areas of agricultural reform, which can be partially credited for the turnaround, fundamental structural re- forms in the sector are far from complete. The Medium Term Policy Reform Agenda The new agricultural policy objectives for Ukraine have been spelled out in the Law of Ukraine "On Stimulation of Agricultural Development for the period 2001­2004." The priority policy objective of the government of Ukraine is the creation of a com- petitive, efficient, and environmentally sustainable agricultural sector in Ukraine. The government is plans to achieve that goal by: increasing the budgetary support to agriculture; introducing price support mechanisms for domestic producers; granting favorable terms of taxation for agricultural producers; providing subsidized credit to agricultural producers; and export promotion and protection from import competition. Agricultural Policy Framework 21 The adoption of such a law is an important step in developing a coherent agricultural policy framework in Ukraine. The law takes into account recent changes in land and assets ownership in Ukraine. It relies mostly on indirect instruments of producer sup- port (favorable terms of taxation, subsidized credits), rather than on direct intervention of the government in production or input supply, which is an improvement over past policies. However, some provisions of that law are not consistent with market reforms. While it states the principle of non-interference of government bodies in the decision- making process of private agricultural enterprises, the law explicitly allows for price con- trols for the first time since full price liberalization was declared at the very beginning of reforms. The law also introduces a government price support scheme based on "nor- mative" costs and average rates of profits in the economy. It is not clear how an intro- duction of price supports and controls is consistent with Article 3 of the law stating that prices for agricultural commodities in Ukraine are determined by market supply and demand. The law is still focused too much on stimulating agriculture production in the short- term, while ignoring some critical public sector responsibilities in agriculture and in rural areas in general. The law does not address the need for more investment in agri- cultural education and research, rural infrastructure development and other rural ser- vices which are an important source of medium- and long-term agricultural growth and competitiveness. Clearly, the law is a compromise between old agricultural interests and new wave of reformers. Some provisions of the new law clearly cannot realistically be implemented in practice. For example, it was stipulated in the law that the allocation of funds from the state budget for agricultural development should be not less than 5% of budget expenditures. That goal was not achieved in 2001, when agriculture received only 1.96% of budget revenues. Many promised benefits (such as guaranteed producer support prices) may not be achieved due to the lack of budget resources. The results of the first two years of implementation of the program were mixed. On the other hand, the support for agriculture through debt write-off and restructuring and tax breaks which fall outside of the annual budget figures have been substantial, but it is not clear whether this type of support is yielding the desired results or is sustainable in the medium-term. While the Government effort to create a medium-term framework is laudable, it falls short of what is necessary to achieve real policy reform and long-term competitiveness in Ukrainian agriculture. Ukraine needs to develop a comprehensive and long-term agri- cultural and rural strategy which effectively addresses major challenges facing the sector, such as increasing efficiency and competitiveness of the entire food and agriculture sec- tor, reintegrating Ukraine into international markets and fostering closer trade relations with the enlarged European Union, reducing rural poverty, and improving the quality of rural life. A summary of the policy actions required by the Government in order of priority follows below: (more detailed recommendations are provided in each chapter). Develop a comprehensive rural strategy. · redirect government budget expenditures from agricultural production sup- port to social service provision; 22 Achieving Ukraine's Agricultural Potential · address rural underemployment and poverty issues; · develop rural physical and social infrastructure; · support the rural non-farm economy. Introduce coherent and stable domestic support policy for the agricultural sector. · establish an agricultural support system based on rules and principles rather than ad hoc administrative decisions that create uncertainty and risk in markets; · develop support policies that are fiscally sustainable and credible; · remove the bias toward supporting large-scale farms. Complete land reform and farm restructuring. · complete land privatization and issuance of land titles to owners of the land; · complete large-scale farm restructuring, including the settlement of non-land assets and farm debt, and enforcement of hard budget constraints; · reduce transactions cost in land markets, by developing a legal framework for rights and mortgages and a title registration system. Keep improving the trade environment for agriculture. · complete WTO accession; · improve trade relations within the CIS; · develop a strategy to improve and expand relations with the European Union; · create a trade policy regime which supports Ukrainian exports; · reduce price distorting import restrictions. Create the conditions necessary for efficient factor markets for agriculture. · minimize government interference in markets for products, inputs, and services; · complete agribusiness enterprise privatization and improve corporate governance; · develop a legal and regulatory environment that supports rural credit; · promote non-farm employment to develop labor markets in rural areas. Provide adequate public goods to ensure a functioning market-based agricultural sector. · establish a market-conforming administrative system at the central and local levels, e.g. permits issued by local administrations should not be required for the transportation of agricultural products; · upgrade food safety, phytosanitary, and veterinary regulatory systems to be consistent with international standards; · support the development of agro-food market information systems; · restructure public agricultural research and extension services to respond to the needs of private sector farms and agribusinesses. C H A P T E R 3 Domestic Support Measures A s Ukraine approaches WTO accession, a good understanding of Ukrainian agricultural policies, their mechanisms and consequences, becomes crucial for policymakers and the public both in Ukraine and abroad. This chapter pre- sents an overview of principal domestic agricultural policy measures implemented in Ukraine since its independence. Price and Income Support Several periods can be distinguished in the evolution of domestic price and income support measures in Ukraine since independence: (a) 1992­1993: continuation of state orders (goszakaz) for main agricultural products based on "indicative" prices; (b) 1994­1995: phasing-out of state orders with formal state purchases limited to grain and sugar; (c) 1996­1999: barter-based pricing through state commodity credit; grow- ing impact of regional policies10 on agricultural pricing; and (d) 2000­2003: discon- tinuation of state commodity credit schemes; new mechanisms of centralized11 price regulation for grain and sugar; and continuation of strong impact of regional policies. 1992­1995: Despite the general price liberalization announced in 1991,12 the agricultural price State Orders and regime in Ukraine in 1992­1993 maintained the basic features of the previous com- Indicative Pricing mand system. Soviet-era state orders were maintained for basic agricultural products, meaning that agricultural enterprises were obliged to sell fixed amounts of their output to state procurement agencies. The share of products delivered to the procurement sys- tem in 1992­1993 reached over 90% of the total marketed volume of sugar beet, 33% of grain, 64% of milk, 78% of beef, and around 50% of pork and poultry meat. The 10The term "regional policies" is used here and elsewhere in the text in a broad sense to include all formal or infor- mal, direct or indirect practices of regional administrations, which affect agricultural marketing and pricing. 11The term "centralized" is used here and elsewhere in the text to denote policies implemented by the central gov- ernment of Ukraine. The central government policies are distinguished from regional policies of regional administrations. 12Resolution of the Cabinet of Ministers of Ukraine No. 376 "On Price System in the National Economy and Con- sumer Market of Ukraine" of December 27, 1991. 23 24 Achieving Ukraine's Agricultural Potential B O X 3 . 1 Chronology of Agricultural Enterprise Debt Restructuring in Ukraine, 1992­2001 April 3, 1992 Decree of the President of Ukraine No. 208 "On Monetary Compensation of Losses to Agricultural Producers and Banks." The Decree stipulated the write-off of agricultural enterprises' overdue debt on bank loans received before January 1, 1990 and January 1, 1992 and amounting to 1.8 billion karbovanets (US$8.7 million). January 21, 1993 Resolution of the Cabinet of Ministers of Ukraine No. 8-93 "On Claiming Overdue Taxes and Other Payments." The overdue taxes and payments to other centralized funds were restructured to agricultural enterprises. June 5, 1997 Law of Ukraine No. 314 "On Write-off and Restructuring of Fiscal Arrears of Taxpayers as of March 31, 1997." The Law concerned debts of agricultural enterprises: on VAT, profit tax, land tax, payments to the State Innovation Fund, Chernobyl Fund, payments for use of natural resources, Pension Fund and Social Insurance Fund payments. All debt accrued on these payments before 1994 was written off; while the principal debt and the penalties on this debt accrued between 1994 and 1997 were rescheduled until 2008, with the first installment to be paid in 1998. Thereby, 494.9 million hryvnia (US$265.9 million) were written off and 831.0 million hryvnia (US $ 446.5 million) rescheduled. June 18, 1998 Decree of the President of Ukraine No. 651/98 "On Write-off and Restructuring of Fiscal Arrears of Taxpayers-- Agricultural Enterprises and Sugar Processing Plants as of January 1, 1998." The Decree concerned arrears of agricultural enterprises and sugar plants on various taxes, as well as payments to Pension and Social Insurance Funds as have accrued by January 1, 1998. These arrears were restructured for 5 years. Debtors who would fully pay the amount of taxes and other payments due in 1998, would be granted a write-off of their total debt accumulated before 1998. Under this Decree, only sugar plant debt was forgiven, of which 603.1 million hryvnia (US$246.2 million) were written off and 2284.7 million hryvnia (US$932.7 million) restructured. February 5, 1999 Law of Ukraine No. 428 "On Write-off and Restructuring of Fiscal Arrears of Taxpayers--Sugar Processing Plants as of January 1, 1998 and Agricultural Enterprises as of January 1, 1999." Provisions analogous to Decree No. 651/98. Under this Law, 964.8 million hryvnia (US$233.6 million) were written off and 1517.7 million hryvnia (US$367.4 million) were restructured to agricultural enterprises. March 16, 2000 Law of Ukraine No. 1565 "On Write-off of Fiscal Arrears and Charges (Obligatory Payments) of Taxpayers in View of Reforming of Agricultural Enterprises." Arrears on obligatory payments of agricultural enterprises undertaking restructuring as accrued at May 1, 2000 were written off in the amount of 5.4 billion hryvnia (US$992.6 million). January 18, 2001 Law of Ukraine No. 2239 "On Amendments to the law of Ukraine On Write-off of Fiscal Arrears and Charges (Obligatory Payments) of Taxpayers in Light of Reforming of Agricultural Enterprises." Additional 494.3 million hryvnia (US$92 million) were written off from the fiscal debt of agricultural enterprises. government continued to be the principle price-setting agent, applying the traditional "cost-plus" approach. Strong increases in input prices during this period resulting from the overall price liberalization, necessitated monthly indexing of agricultural procure- ment prices (which were now called "indicative"). The indexing was, however, not suf- ficient to keep pace with hyperinflation.13 The agricultural enterprises experienced serious cash flow disruptions, and agricultural enterprise debt began accumulating. In 1992 and 1993, the Ukrainian government for the first time since the end of the Soviet period had recourse to agricultural enterprise debt restructuring (Box 3.1). During this period, the Government also provided direct budgetary support to pro- ducers to lessen their "inflation-induced" losses. Thus, in 1992 agricultural enterprises received compensation for fuel and electricity, which represented a fixed rate paid per ton of basic agricultural products delivered to the state procurement system. In addi- tion to this general compensation, livestock producers (including households) benefited from supplementary per ton payments for products marketed to the state procurement system. These payments were provided both in 1992 and 1993. 13The December to December CPI reached 2100% in 1992 and 1026% in 1993 (CIS Statistical Committee). Domestic Support Measures 25 During 1994­1995, the Government maintained indicative procurement prices, while deliveries to procurement agencies ceased to be obligatory. As alternative mar- keting channels were still poorly developed, agricultural producers continued to sell im- portant shares of their output to state or parastatal agencies. An additional reason for perpetuating state procurements was that procurement prices during this period were generally set at levels exceeding those offered by non-state buyers. This reflected the Government's attempts to support the profitability of the large-scale sector. In 1994, producers continued to receive supplementary price payments for livestock products which, however, ceased in 1995. 1996­1999: The macroeconomic stabilization program, launched by the Ukrainian government in State Commodity 1995, imposed serious constraints on budgetary spending. As a consequence, in 1996 Credit and Regional the Government discontinued traditional procurement for all agricultural products. Interventions The only exception was grain purchases for which budgetary funds were allocated for two more years (until 1998). However, discontinuation of traditional cash-based centralized procurements did not mean that the state retreated from the agricultural market. Rather, this period is marked by the expansion of the so-called "state commod- ity credit," which was a de facto continuation of state procurements. State commodity credit emerged primarily due to the non-profitability of agricultural enterprises and fundamental disruption of their cash flows. This situation made financing the sector through formal credit highly problematic. At the same time, the Ukrainian government continued to perceive agriculture as a public domain. Supporting agricultural enterprise operations was seen as a direct task of the state. Having experienced an acute deficiency of budgetary resources for traditional advancing and procurement, the Ukrainian gov- ernment shifted almost entirely to commodity credit. State commodity credit represented an in-kind advance of inputs for future in-kind repayment with agricultural products. Most widespread was the seasonal advancing of fuel, fertilizer and farm chemicals, however, long-term credit schemes also existed, i.e. for leasing of agricultural machinery. The mechanisms of state commodity credit were highly complicated and kept changing. The schemes included input producers (private and parastatal companies, often providing supplies against the clearance of their fiscal liabilities), input distributors, and procurement agencies (i.e. Khlib Ukrainy). Sev- eral national ministries, all regional administrations and major producer associations were involved in administration of these schemes. According to estimates by Ukrainian experts, 28% of the total volume of petroleum products and 73% of fertilizers supplied to agricultural enterprises in 1997­1999 were delivered under state commodity credit. Expressed in grain equivalents (the main product claimed for repayment of state com- modity advances) in 1999 these credits equaled about 68% of the total value of grain marketed (Kobuta and Noha 2000). Overall, the practice of state commodity credit created a highly non-transparent en- vironment. This policy, among other factors, contributed to the further accumulation of agricultural enterprise debt. Between 1994 and 1998, the total debt of agricultural enterprises in Ukraine increased from 8% to 13% of GDP (Csaki et al. 2001). Of this total, fiscal arrears represented 45­50%, liabilities to other enterprises (mainly non- repaid input advances) accounted for about 30%, and wage arrears to farm workers for 26 Achieving Ukraine's Agricultural Potential 20% (Sedik et al. 2000). The aggravating financial situation in the agricultural enter- prise sector led the Government to carry out repeated farm debt restructuring. Thus, bad debts to agricultural enterprises were written off and restructured in 1997, 1998 and 1999 (Box 3.1). In addition to debt relief measures, the Government renewed sup- plementary price payments for milk and meat in 1997. Starting from 1998, this sub- sidy was implemented by means of channeling the VAT collected from milk and meat processors to agricultural producers supplying these products for processing. Another important feature of this period (1996­1999) was the increased involvement of regional administrations in agricultural marketing and pricing. At the end of 1995, re- gional administrations were explicitly authorized to build "regional resources" of agro-food products for meeting "regional needs" (Box 3.2). The formal definitions of "regional re- sources" and "regional needs" were very loose, while the authority of regional administra- tions in building these resources remained non-delineated. Therefore, regional administrations had a great deal of discretion in interpreting their powers and responsi- bilities related to the control of local food supply, interventions in marketing of local prod- ucts and pricing. Regional interventions were particularly marked in the grain, meat, milk and sugar sectors. These interventions took various forms, for example, oral orders to agri- cultural enterprise managers to deliver certain quantities to certain plants. In some cases, B O X 3 . 2 Regional* Resources of Agro-food Products: An Unclear Concept and Ambiguous Practices The Law of Ukraine "On Deliveries of Products for State Needs" of December 22,1995, introduced the concept of "special purpose regional programs," under which the regional administrations received the right to organize "deliveries for regional needs" (alternatively identified as "deliveries to regional resources"). The Law did not define the scope of these regional programs, or the concept of regional needs, nor did it specify the authority of regional administrations in determining and enforcing deliveries for regional needs. Although the overall legislation in Ukraine and several Presidential Decrees related to the agricultural sector prohibit interference in private economic activities, this loose ruling on "regional resources" provides regional administrations with substantial freedom in intervening in the local agro-food economy and controlling commodity flows. The practice of "regional needs" and "regional resources" is firmly embodied in the grain, meat, milk and sugar sectors. Grain, for example, is the major staple product in Ukraine. Control over the grain supply and the grain market is often perceived by regional authorities as one of their main political responsibilities. According to the relevant Presidential Decrees** the formation and utilization of regional grain resources is regulated by Orders of the Heads of regional administrations. The latter define the size of grain purchases for regional needs, procedures for their implementation, and designate the respective implementing "operators." These operators include grain farms, grain elevators and mills, bread plants, SJSC "Khlib Ukrainy," and private commercial companies. As noted above, national legislation does not define what particular needs regional resources should cover. This leads to variable regional interpretations. Thus, some regions interpret regional resources as the critical necessities of local social institutions (e.g., supplies of bread products to hospitals, schools, prisons, etc.), others, most often grain deficient territories, stretch this concept as broadly as overall regional consumption. These various approaches are usually not formalized and exist mainly in the form of unwritten administrative practices. Regional administrations that adhere to a broad concept of "regional resources" use different instruments to implement their "regional needs" policies, ranging from regular telephone checks and oral orders to informal price fixing, directing the marketing, or bans on commodity shipments outside regions. In contrast, regions with a more liberal interpretation of regional supplies are typically characterized by lesser interventions in local business environment. *The term "region" denotes the main administrative and territorial units of Ukraine, including 24 oblasts, the Autonomous Republic of Crimea, and the cities of Kyiv and Sevastopol. **Decree of the President of Ukraine No. 767 "On Measures on Agrarian Market Formation and Functioning" of June 6, 2000, and No. 832 "On Immediate Measures on Stimulation of Grain Production and Grain Market Development" of June 29, 2000. Domestic Support Measures 27 newly created regional commodity exchanges were used to control marketing and prices. Such actions partly resulted from the inertia of the previous command system. But during this period regional administrations also based their interference on the need to ensure the repayment of agricultural enterprises' debts to the state. Regional bans on commodity movements become a common practice under state commodity credit schemes. Under these schemes regional administrations often acted as guarantors of commodity deliveries against inputs advanced to local producers, and were also responsible for enforcing the pri- ority order of debt settlement. Overall, direct or indirect regional controls over prices of agricultural products and marketing became widespread during this period. These local practices constituted what is referred to here as "regional interventions," which have be- come an important factor determining agricultural price formation in Ukraine. In sum, domestic price and income measures in 1996­1999 were extremely non- transparent, creating favorable conditions for administrative discretion, abuse and rent seeking. State commodity credit and regional policies adversely affected producer prices and incomes. Government attempts to stop the accumulation of agricultural enterprise debt through large-scale write-offs and additional direct subsidies did not prevent the deepening of the financial crisis in agriculture. This crisis was a symptom of a lack of reform and self-enhancing policy failure. By 1999 the need to change the existing prac- tices had become imperative. 2000­2003: In 2000 the Government stopped state commodity credits.14 As a next step it was Emergence of important to restore monetary exchange in the agricultural sector, and first of all, to New Policy Set facilitate access to credit for agricultural enterprises. The Ukrainian government imple- mented a new series of agricultural enterprise deft relief measures. Agricultural enterprises benefited from a substantial write-off of overdue fiscal payments. In addition, their over- due debt on inputs advanced under state commodity credit was partly written off and partly restructured until 2008. The launching of a preferential credit program for agricul- ture was an additional important measure to revive monetary transactions in agriculture. A number of new policy documents containing provisions on price and income sup- port appeared during this period. The broadest document is the Law "On Stimulation of Agricultural Development for 2001­2004." Article 3 of the Law, entitled "Price for- mation and support of agricultural income," reads:15 "Price policy in the agricultural sector shall be pursued on the basis of free price formation in combination with state regulation and support of income of agricultural producers and antimonopoly control over prices for agricultural commodities as well as agricultural inputs and services used by agricultural producers. 14This was stated in the Resolution of the Cabinet of Ministers of Ukraine No. 50 "On New Approaches of Pro- viding Inputs to Agricultural Producers" of January 17, 2000. It is important to stress that although the commod- ity credit schemes were ceased, the centralized supply of inputs to large-scale farms was continued. However, the deliveries were made mainly to solvent farms and only on the condition of pre-payment. Fuel, lubricants and min- eral fertilizer were supplied through these state contracts, while centralized deliveries of spare parts and plant pro- tection agents were discontinued. 15The citation is based on the latest version of the Law incorporating amendments introduced by the Law of Ukraine No. 2514-III "On amending the law of Ukraine `On Stimulation of Agricultural Development for 2001­2004' " of June 7, 2001. 28 Achieving Ukraine's Agricultural Potential Prices received by agricultural producers, processing, supply, service and other en- terprises and organizations for commodities, works and services are formed on the basis of demand and supply and taking into account state support as based on industry nor- mative costs and economy-average profit rate. Price policy and income support for agricultural producers are aimed at ensuring the reproduction of agricultural products through the introduction of pledge prices (support prices), and the regulation of incomes through a system of state grants and subsidies. The state shall create a system for monitoring of prices of agricultural products and agricultural inputs (services) used in agriculture." In its original version (of January 18, 2001) Article 3 also included the following provi- sion: "Beginning from 2001, the Cabinet of Ministers of Ukraine sets annually price (tar- iff) ceilings for domestically produced electricity, gas, and oil products used in agricultural production." This provision was repealed six months after the adoption of the Law. Article 3 suggests that the Law does not extend beyond some general statements on price and income policies. The "demand and supply" principle of price formation is stated along with "state support based on industry normative costs and economy-average profit rate." The Law does not specify the concepts of "industry normative costs" and "econ- omy-average profit rate," and does not contain more specific regulations on the scope and extent of state support. The document, therefore, sets a rather loose framework for gov- ernment's potential interventions in agricultural pricing. The absence of an explicit and clearly defined position of the Ukrainian government concerning price and income support, which at the same time would be consistent with Ukraine's future WTO commitments, creates risks that the actual price policies in Ukraine may be driven by partial regulations, ad hoc measures, and non-transparent and informal administering. 2000­2002: Two specific regulations were in fact introduced during 2000­2001 in Ukraine's tra- Sugar and Grain ditionally controlled sectors. These include a quota regime for sugar and a pledge price Price Regulations mechanism for grain. The sugar quota was introduced in 2000.16 It generally emulates the EU sugar quota system, however, it provides for no export subsidy on exportable surpluses (Ukraine of- fered no recourse to export subsidies in its WTO accession negotiations). The national marketing quota for sugar produced from domestic sugar beet, as well as minimum in- quota prices for beet and sugar, are fixed annually. The overall national quota is allocated to regions, and then to sugar plants and sugar beet growers. This was the second intro- duction of the regime after the first unsuccessful attempt in April 1997. The 1997 reg- ulation prohibited processing based on tolling contracts.17 This was, however, the main operating principle in the sugar industry with the severe shortage of liquidity. Under the 1997 provisions, sugar refineries had to purchase sugar beet for cash. This provision made the implementation of new sugar regime unfeasible, as only a few refineries could oper- ate on a cash basis. While the regulation was finally suspended only one month after its 16Law of Ukraine No. 758 "On State Regulation of Sugar Production and Marketing" of June 17, 1999 specifies the quota mechanism. 17Under a tolling contract, processor pays a supplier of raw materials (in this case, sugar beet producers) with a prod- uct processed from these materials (sugar). Domestic Support Measures 29 introduction, this attempt to introduce new price regime created a great deal of uncer- tainty in the sugar sector (Cramon-Taubadel 1999). The launching of the sugar quota in 2000 was preceded by the debt restructuring in the sugar industry. Refineries were also made eligible for the preferential credit program in 2000­2001.18 These measures eased access to credit for sugar refineries and attracted some liquidity into the sector. However, the present sugar quota regulation does not prohibit tolling contracts, which continue to dominate sugar processing. In 2001 and 2002 marketing years, the quotas were set at 2 and 1.8 million tons of sugar with a minimum price for white sugar at US$470 and US$455 per ton respectively. These price levels compare with CIF prices of US$330­390 per ton registered for the largest white sugar shipments to Ukraine (from Brazil and France). And, finally, domestic quota regime is complemented by a tariff rate quota on sugar imports with high over-quota tariff (see Chapter 4 "Trade policy and WTO accession"). For 2003 marketing year the amount of sugar quota and a minimum white sugar price were maintained at the previous year level.19 The new price support mechanism for grain was launched in 2001,20 prompted by a bumper crop. Farm gate prices for wheat and barley, for example, declined by more than 20% in nominal terms in 2001 (with an annual inflation rate of 12%). This in- creased government concerns over the negative impact of such sharp price falls on agri- cultural income. The new mechanism, officially called grain pledge purchases, followed the main features of the US loan rate program for grains. It was conceived as an instru- ment of seasonal withdrawals and discharges of grain from/onto the market to prevent strong variations in grain prices. The mechanism enables producers to receive a loan (based on the pledge price) upon delivery of grain to state-authorized agencies. Pro- ducers can claim grain back within eight months on the condition of repaying the loan, otherwise they lose the title to the product. The authorized purchasing agencies are se- lected through tender. The first purchases under the scheme were made in 2001. Due to the lack of finance raised, they amounted to only 0.1 million tons.21 However, ac- cording to the Ukrainian grain market analysts, the program had an indirect impact on market prices in 2001, as the market agents viewed the announced pledge price as a minimum price reference. Anticipating a second consecutive large harvest, the Gov- ernment intended to buy 3 million tons in 2002 (or about 20% of the annual amount of grain marketed at the primary domestic market in 2002­2001). It was expected that such a withdrawal would effectively prevent sharp falls in grain prices. However, the Government faced serious constraints in implementing the 2002 purchases. Funds for pledge purchases were not allocated in the 2002 state budget, while alternative funding (from the State Reserve Fund) was not made available, as had been expected. In this sit- uation the Government departed from the original formula of the pledge price and fixed 18Not in 2002, when only agricultural enterprises were eligible for preferential credits. 19Resolution of the Cabinet of Ministers of Ukraine No. 1977 "On State Regulation of Sugar Production and Marketing" of December 25, 2002. 20Resolution of the Cabinet of Ministers of Ukraine No. 1141 "On Introduction of Pledge Grain Purchases from Agricultural Producers" of July 21, 2000. 21In 2001, for purchases of grain, the authorized agencies could borrow credit from commercial banks and receive a 100% compensation of interest from the government. In 2002 the pledge purchases were financed only through budgetary funds, but the amount allocated for this activity was very small. 30 Achieving Ukraine's Agricultural Potential its level at 50% of the weighted average price registered at the commodity exchange market at the moment of registration of the pledge contract.22 This substantially re- duced producer interest in participating in the program. Not more than 0.1 million tons of grain were purchased in 2002, which had no effect on market prices. In June 2002, a Law "On Grain and Grain Market in Ukraine" (the Grain Law) was adopted. A provision on grain pledge purchases was incorporated in the document, indicating that the Ukrainian government views it as part of its grain market regulation strategy. The same Law in addition stipulates "direct purchases of grain during the har- vesting season" with its subsequent sale, in case of need, in regions with a low grain sup- ply. The Law also foresees "grain purchases for intervention purposes." It is not clear why the document introduces all these largely overlapping instruments. It seems that the underlying intention is to provide as broad as possible a legal framework for poten- tial state grain purchases. Although formal price regulation was implemented in 2000­2002 only in the grain and sugar sectors, various informal, ad hoc, and indirect interventions affecting pro- ducer prices continued both at the central and regional levels. The grain sector is the most illustrative case. In June 2000, a presidential Decree obliged grain traders to reg- ister all domestic and export contracts at accredited commodity exchanges.23 The gov- ernment explained this measure by the urgent need to control the grain situation, given the large export outflows in the preceding year and the low forecast for the coming har- vest. Grain traders, therefore, had to incur additional costs in searching for brokers and paying for quasi-intermediation. Most probably, this requirement resulted in some grain disappearing into gray trade. One month later (in July 2001) the provision on the compulsory registration of domestic transactions was removed, however the require- ment was maintained for export contracts. Another regulation followed in 2001, when the Ministry for Agrarian Policy attempted to introduce obligatory reporting of the amounts of stored grain.24 This measure was soon suspended under pressure from var- ious international donors stationed in Ukraine (the World Bank, USAID, and others), who considered it as an interference into private economic activities. This requirement has later re-emerged in the Grain Law, and then in the Resolution of the Cabinet of Ministers,25 which obliged all entities involved in grain storage to declare monthly the quantities of grain kept in owned or leased facilities. The still existing considerable fiscal and credit debt of agricultural enterprises per- petuates controls over marketing and prices at local levels. Binding agricultural enter- prises' deliveries to debt repayment is a common practice. For example, while no budgetary allocations were made for grain purchases in the majority of regions in 2001, designated regional purchasing agencies received grain from local producers in repay- 22Resolution of the Cabinet of Ministers of Ukraine No. 590 "On Setting Pledge Prices and Financing of Pledge Grain Purchases" of April 29, 2002. 23Decree of the President of Ukraine No.832 "On Immediate Measures on Stimulation of Grain Production and Grain Market Development" of June 29, 2000. 24Order of the Ministry of Agrarian Policy No. 163 of June 13, 2001. 25Resolution of the Cabinet of Ministers of Ukraine No. 1877 "On Approval of Procedure For Declaration of Grain Quantities by the Grain Storage Entities" of December 12, 2002. Domestic Support Measures 31 ment of overdue debt to regional administrations (or their purchasing agencies). A sim- ilar situation was observed in the milk, meat and sugar sectors. In enforcing agricultural deliveries to designated channels, regional administrations may not only be driven by the responsibility for recovering agricultural enterprise debt; they may also have broader considerations, such as tax collection, for example. Some regional administrations seek to ensure sufficient supplies of raw materials to local food processors, in order to sup- port their production, and, consequently, their taxable base. Cases are known whereby regional authorities prohibited raw milk shipments to other regions before sufficient supplies were made to local processing plants. It is quite probable that the same prac- tices apply to other agricultural commodities. Agricultural enterprise debt or the ruling on "regional needs," or both, make such administrative actions possible. It is worth adding that independent agribusiness companies often seek formal or informal guaran- tees from regional authorities for the repayment of inputs advanced to local producers. The willingness of regional officials to provide such guarantees can partly be explained by the fact that some of these officials may have vested interests in private businesses operating locally. It is not uncommon for regional functionaries to have close links with local companies as stakeholders, or through family or other associations with the companies' management. Most probably, in the cases described above, regional ad- ministrations have a great deal of leverage in influencing the price levels for delivered agricultural products. 2003: "Grain Crisis" An emergency situation in the grain sector in 2003, denoted in Ukrainian media as and Strengthening of "grain crisis," prompted strengthening of administrative controls in Ukraine's main Formal Price Controls agricultural markets. Grain growing conditions in Ukraine turned out to be extremely unfavorable in 2003, bringing the grain crop down to an estimated 20­21 million tons, or almost to one-half of the previous year level. Wheat production suffered the largest losses, and fell by nearly 80%. Already in the spring of 2003 it became evident that under these con- ditions Ukraine would be facing a significant deficit in domestic supply of food grain, and most probably, rises in wheat and bread prices. The situation took a very acute po- litical dimension and was largely blamed on inadequate monitoring of grain supply and "uncontrolled" export outflows. The Ukrainian leadership has regarded the perspective of rising bread prices as po- litically inadmissible. A Presidential Decree26 was released in May 2003, ordering to re- plenish state and regional grain stocks, allocate necessary budgetary funds for such purchases, and strengthen monitoring of agricultural production and markets. The De- cree also stipulated the speeding up of the financial rehabilitation and restructuring of the parastatal grain buying agency "Khlib Ukrainy." In July 2003, a Resolution of the Cabinet of Ministers27 followed, which temporarily gave regional and city administra- tions the right to regulate prices of grain, flour, pasta, breads, and in addition of such 26Decree of the President of Ukraine No. 415 "On Additional Measures Related to Stabilization of Grain Market" of May 19, 2003. 27Resolution of the Cabinet of Ministers of Ukraine No. 1150 "On Shortcomings in the Work of Selected Execu- tive Bodies on Ensuring Food Security, and Measures on Stabilizing Main Food Markets" of July 24, 2003. 32 Achieving Ukraine's Agricultural Potential foodstuffs as sugar, beef, sausages, milk, cheese and butter. As a large part of the do- mestic demand for food and seed grain for the 2003/2004 season had to be covered by imports, the Government's "grain price stabilization" package also included temporary removal of import duty on wheat and rye (until July 2004). Inter-governmental agree- ments with Russia and Kazakhstan were concluded on supplies of grain to Ukraine.28 Shortly after the adoption of these decisions, the majority of Ukrainian regional ad- ministrations introduced grain price ceilings and limits on processor and retailer mark- ups for bread and bakery products. Later in the year the Cabinet of Ministers of Ukraine recommended to all regional administrations to set processor mark-ups for flour and breads at 5%.29 Urgent reallocations in the regional budgets were carried out, and ad- ministrations intensified purchases towards regional grain stocks. Regional bans and re- strictions on grain movements were renewed. These practices were largely prompted by the fact that the central authorities explicitly stressed the responsibility of regional ad- ministrations for "regional food security" and for building regional grain stocks.30 Along with the regional stocks, centralized (national-level) grain purchases were boosted. The government assigned the State Reserve Fund to purchase 1 million tons of grain, and Khlib Ukrainy, not less than 300,000 tons. The latter was supposed to implement its purchases partly as "intervention operations," and partly, as the grain pledge program. Khlib Ukrainy was nominated as a sole agent for implementation of the grain pledge program in 2003. As of December 2003, about 120,000 tons of grain were purchased under this program. Notable developments in the price regime occurred not only in the grain sector, but also in the livestock sector in 2003. According to the decision of the Cabinet of Minis- ters, an Interdepartmental Commission has been created, consisting of representatives from several national ministries, regional administrations, professional associations and research institutions. Its task was formulated as "coordination of inter-industry relations on livestock product markets." Commissions with similar functions have been also cre- ated in each region "to assist producers and processors in the development of mutually beneficial working conditions." In particular, they were made responsible for monitor- ing farmgate prices for meat and milk products. In 2003, regional commissions began setting "recommended minimum prices" for these products in all Ukrainian regions. Another important feature of the policy scene was the preparation for adoption of the Laws "On Milk and Milk Products" and "On Meat and Meat Products." Both drafts incorporate provisions enabling the Cabinet of Ministers to set minimum guaranteed producer prices for these products, as well as to control processing and retail margins. At the moment of writing, the Ministry of Agrarian Policy together with producer and food industry representatives are elaborating the definition of such minimum guaran- teed prices. 28Thus, in August 2003, the Russian government agreed to supply 116,000 tons of soft wheat from its Federal In- tervention Fund as commodity credit to the Ukrainian government. 29Resolution of the Cabinet of Ministers of Ukraine No. 1747 "On Urgent Measures On Stabilization of Situation On the Market of Food Grain, Bread and Bread Products" of November 10, 2003. 30Restrictions on grain movements and interventions in the grain pricing by regional administrations have been pro- hibited under two Decrees of the President, and later, by the Grain Law. In fact, the incidence of such bans was very low in 2001­2002 when the grain supply was ample. Domestic Support Measures 33 Assessment and In 2000 Ukraine found itself at a turning point, when its price policies and instruments Recommendations needed serious re-consideration. Discontinuation of state commodity credits, combined on Price and with debt relief for agricultural enterprises and credit facilitation measures, meant that Income Support the Central Government was departing from previous barter-based procurements. This created an opportunity for putting in place a new policy framework, which would be conducive to more transparent and less distorted agricultural input and output markets. To what extent has this opportunity been exploited, and the newly emerging price mea- sures and instruments moved Ukraine towards less distorted agro-food markets? The policy documents and practices that have emerged since 2000 point at gradual strengthening of domestic price controls in Ukraine based on such instruments as di- rect price and supply regulation (e.g., sugar quota and recent "grain price stabilization" measures), market price interventions (e.g., pledge grain purchases), and specific mar- keting requirements (e.g., carrying out transactions through commodity exchanges). The sugar quota was introduced after long lobbying by the sugar industry for higher state support. The analysis of this program by an independent expert before its intro- duction concluded that the regime "would do nothing to change the fundamental lack of competitiveness of the Ukrainian sugar industry" (Cramon-Taubadel 1999). It is dif- ficult to disagree with the author's reasoning: the quota drastically curbs incentives for improving efficiency; with high sugar production costs in Ukraine, supported prices do not provide sufficient resources for modernization, but at the same time they create an additional burden on consumers. Finally, the quota implementation mechanism is based on purely administrative procedures, creating grounds for corruption and rent seeking. The three-year experience of grain pledging indicates that purchases did not have much impact on grain market prices, meaning that so far the program has failed to achieve its stated goal. In a deficit year of 2003, the pledge program should supposedly have worked in a way of releasing grain onto the market, however, no information is available if such disbursements have been effectively carried out. Tight price controls that were introduced in the grain chain in 2003, and most likely, quite limited stock available for release, largely removed the rationale for such a regulatory mechanism as pledge program. Apparently, the government's financial capacity has so far been in- adequate to implement the program on a scale that would produce visible effects on the market. As there is little evidence that the availability of budgetary resources for this ac- tivity will increase substantially in the short to medium-term, it seems logical to ask if continuation of the program is advisable. The budgetary resources involved could be directed to other activities contributing to price and income stabilization more tangi- bly. Some of such activities are discussed further. In 2003, regional administrations were explicitly authorized to control grain sup- ply, and grain and bread prices. Such controls were established throughout the whole grain marketing chain in all Ukrainian regions. It is worth noting that not only grain and bread prices, but also other foodstuffs were made subject to similar controls. The official documents stipulated that such food price controls were introduced as a tem- porary measure, but no concrete date of its discontinuation was stated. Clearly, these measures emerged as a reaction to sharp food grain deficit and as an attempt to prevent 34 Achieving Ukraine's Agricultural Potential its grave social consequences. It is, however, important to ensure that the emergency sit- uation of 2003 would not be used to reinstate and perpetuate overall price administer- ing in Ukraine. In this context, it is also worth mentioning Ukraine's plans to introduce minimum guaranteed producer prices for milk and meat. This measure is seen as necessary to halt the reduction of head size in former collective agricultural enterprises, particularly in view of the planned discontinuation of processor VAT refunds to milk and meat pro- ducers. However, before the introduction of this policy measure, it would be very im- portant to consider its long-term effects and its impacts not only on producers, but also food consumers, taxpayers and the downstream sector: Consumer and taxpayers impacts: minimum producer prices will most likely re- sult in increased consumer prices. This, however, does not seem to be a politi- cally acceptable outcome for Ukraine. Therefore, the government could face the problem of controlling retail prices. This would mean introducing the limits on processor and retailer mark-ups, or directly subsidizing the downstream sector or consumers. Therefore, minimum producer prices in the social conditions of Ukraine would very likely necessitate either restoring to administrative price con- trols at all levels of food chain, or additional budgetary spending, or both. Downstream sector impacts: minimum producer prices and linked controls on processor and retailer mark-ups bear serious risk of undermining the profitabil- ity of these sectors. A recent example can be drawn from the bread price controls established in the summer of 2003, when many bakeries began operating at a loss soon after the introduction of mark-up limits. Over a longer-term, such price controls substantially reduce incentives for potential private investors and impede the modernization and restructuring of the food industry. Agricultural adjustment impacts: the modalities of the program are not finalized yet, but according to information available to date, minimum prices are con- ceived as a blanket producer support based on "normative production costs." However, the support based on "normative" or "average" costs of production has a fundamental flaw in that it is impossible to define the "right" level of such costs. If all producers are guaranteed to receive a certain price, there will be those who are more efficient and have lower costs, those who are less efficient and have higher costs, and those who are as efficient and have the same costs. For the first group the guaranteed price creates rent, for the second group subsidy, and for the third, no-loss conditions. What is common for all three groups in this situation is that their incentives to improve efficiency and reduce costs are weakened, if not totally lacking. Therefore, a guaranteed price is by its nature an impediment to producer adjustment, and it is an extremely complicated task to identify the "op- timal" level of such price which would be least inhibiting for the adjustment. Considering price support in general, several additional aspects of this policy should be noted. According to OECD analysis, market price support is one of the least efficient policy instruments for transferring income to producers, but at the same time it is one of the most trade distorting (OECD 2002c). Due to its substantial trade distortion ef- fects, market price support is becoming increasingly contentious under multilateral Domestic Support Measures 35 trade agreements, and above all, within the WTO, accession to which Ukraine is cur- rently negotiating. The new round of WTO negotiations will likely impose much stricter rulings on use of domestic price interventions. Therefore, in the longer run Ukraine might find itself with serious constraints in implementing such programs. Finally, if Ukraine is to exploit its potential as an agro-food exporter, it has to be price- competitive at international markets. However, if domestic price support is implemented, internal prices would increase and the competitiveness of Ukrainian exports would be reduced, particularly, keeping in mind that the country will not be able to subsidize its exports according to its WTO future commitments. Hence, the orientation at market price support goes against the government's long-term goal of Ukraine becoming a large agro-food exporter. It is important to stress though that the volatility of agricultural prices and low agri- cultural incomes is a legitimate government concern. Policy concerns, however, should be translated into effective policy measures. One has to understand the primary causes of price volatility, and target policy measures at removing these causes, at least those that can be influenced by the government. Several issues could be highlighted in this respect: Institutional and infrastructural weaknesses of Ukrainian agricultural markets are undoubtedly important causes of farm price instability in Ukraine. The govern- ment's efforts at price stabilization should be concentrated first of all on remov- ing these weaknesses. Improvements in storage and transportation networks, market information, better access to credit, development of insurance and other risk hedging institutions, are all critical areas for state support if price stabiliza- tion is targeted in Ukraine. Another fundamental impediment is the low efficiency of the up- and down- stream sectors in Ukraine. When these sectors are not competitive and cost- inefficient, it is likely that these inefficiencies are passed onto primary producers. For example, the high cost of processing, transportation, and storage results in downward pressures on farm prices to compensate for these inefficiencies. These pressures are stronger the less developed and more monopolized the processing sector is. Similarly, a non-competitive processing sector can act as a source of agri- cultural price instability, unable to absorb external input or output price shocks, it passes them onto agricultural producers. Therefore, competition and structural measures in the upstream and downstream industries, as well as policies stimu- lating investment in these sectors, would also be the most effective response to the problem of farm price instability and low agricultural incomes. The existing Ukrainian border regime for agro-food trade, providing for a rela- tively high protection from imports can under certain situations become an addi- tional factor of domestic price instability (this phenomenon is discussed in Chapter 4, as well as in Annex 4 under the overview of trends in support for grains). Ukrainian agriculture needs technological modernization which would help to achieve more stability in production and yields. Therefore, it is an urgent task to facilitate adoption of modern agricultural technologies, as well as to strengthen support to agricultural research in Ukraine. 36 Achieving Ukraine's Agricultural Potential Not only specific price policies, but also the overall policy environment, strongly affects agricultural markets and prices. In this regard two features of the current policy envi- ronment in Ukraine should be noted. First is the lack of policy stability and trans- parency, which remains a constant factor in Ukraine. Such practices contribute to market instability, undermine the confidence of market participants and enhance risks. A second noteworthy feature of the policy environment in Ukraine is the high incidence of implicit interventions in agricultural marketing and prices, particularly at local lev- els. This is partly due to flaws in national legislation and enforcement mechanisms, for example the absence of a clear definition of authority of regional administrations in con- trolling the local food supply. However, even more than legislative imperfections, ad- ministrative discretion is explained by poorly developed market institutions, when administrative orders replace missing information, insurance, legal, credit and consult- ing systems. Several initiatives contained in the government's recent policy documents can be considered as a positive move towards addressing the problem of institutional and in- frastructural weaknesses of Ukrainian agricultural markets. First is the adoption of the "Comprehensive Program for the Development of the Agricultural Market" prepared by the Ministry of Agrarian Policy. This document contains an elaborate and structured list of measures for developing the agricultural market infrastructure, information, qual- ity systems, etc. This is an encouraging sign that agricultural policymakers in Ukraine began considering these problems. Another example is the provision on creation of a price monitoring system for agricultural products inputs in the Law "On Stimulation of Agricultural Development for 2001­2004." At present, only a small price monitoring unit functions within the Ministry of Agrarian Policy. It consists of three people and has no outreach capacity. Agricultural departments of several regional administrations have units collecting market informa- tion, but their capacity is also very limited. Some official statistical bulletins with in- formation on agricultural prices and markets are published in Ukraine, nevertheless this information is limited and often outdated. Market reports and price information from private consulting companies lack systematic coverage and are relatively expensive. Cre- ation of a nation-wide public price monitoring system for the agro-food sector would be highly instrumental in improving access to information for all market participants and, therefore, facilitating the establishment of transparent and competitive markets. Such a system would be indispensable for the Ministry itself in order to improve the awareness of the situation in the sector, enabling it to carry out a well-founded diagno- sis of the situation, and make effective policy decisions. Another positive development is the government's intention to develop a warehouse receipt system for grain, which is stated in the Grain Law, and once again stipulated in the official documents adopted in 2003. Adequately organized, this system could bring substantial improvements in storage, credit, and product quality control in the Ukrain- ian grain market. However, all these initiatives have not yet reached the implementa- tion stage. For example, under the draft state budget, 2 million hryvnia were to be allocated for the price monitoring system in 2002, but these funds were not actually ap- propriated. The project has progressed only to the stage of approval of "Guidelines for Domestic Support Measures 37 the Creation and Development of a Price Monitoring System in the Agro-Industrial Complex." In conclusion, the following policy recommendations are suggested: The Ukrainian government is recommended to reduce the overall policy uncer- tainty and its negative impacts on agricultural markets and prices. The policy- making process should be transparent and involve information and dialogue with all major stakeholders. The incidence of discretionary, inadequately founded and short-lived measures should be eliminated from agricultural policy practices in Ukraine. Specific situation in the grain sector in 2003 should not be used to reinstate and perpetuate overall price controls in Ukraine. National legislation should explicitly and clearly define the authority and the di- vision of responsibilities between central governments and regional administra- tions in implementing agro-food policies. The Ukrainian government and regional authorities are recommended to shift the policy focus from intervening in markets to developing market institutions that would reduce transactions costs and instability on agricultural markets. The central and regional governments should concentrate on measures stimulat- ing the adoption of modern technologies, development of agricultural market infrastructure, information, risk management systems, credit, and legal ser- vices, etc. These measures should have adequate financial support, and re- spective provisions should be foreseen in the state and regional budgets for agriculture. As an immediate step, the Ministry for Agrarian Policy should prepare an action plan for implementation of the "Comprehensive Program for the Development of the Agricultural Market," and secure financing to carry it out. The Ukrainian government is recommended to undertake a broad evaluation of minimum guaranteed milk and meat prices, taking into account impacts of this measure on all interest groups, including consumers, taxpayers and down- stream sector. Implications of minimum guaranteed prices for Ukraine's future WTO commitments on domestic support should be also explored. Minimum guaranteed prices, if introduced, should represent a temporary measure with clearly stated terms. It is recommended to avoid blanket sup- port and target this assistance to producers having a potential for increased ef- ficiency. Minimum guaranteed prices should be implemented in a package with broader assistance for improvement of technologies, product quality and marketing. The Ukrainian government may consider initiating a comprehensive study by in- dependent experts on the competitiveness of the Ukrainian sugar sector and its long-term perspectives. The study should cover all aspects of sugar production, consumption and trade in Ukraine, and include full economic and social assess- ments. The study should be used as a base for preparing a restructuring program for the sugar industry in Ukraine, including a phasing-out of sugar quota. Dur- 38 Achieving Ukraine's Agricultural Potential ing the phasing-out period, the quota may be used as an instrument for target- ing support to sugar processors and beet growers with clear business development perspectives and modernization plans. Tax and Credit Policy Tax Policy Agricultural tax policy in Ukraine experienced a rather radical change in 1999 when, after several years of experiments, a new system of taxation based on so-called fixed agri- cultural tax was introduced.31 The reform of agricultural taxes was prompted by the low level of tax collection in the sector and continuing accumulation of tax arrears. In 1999, for example, agricultural enterprises paid only 52% of taxes due and accumulated 599 million hryvnia in tax arrears (Ministry of Agrarian Policy of Ukraine). The 1999 agricultural tax reform included the following elements: The mechanism of tax payments was simplified. Under the new tax system, eligible agricultural producers are paying three principal taxes (fixed agricultural tax, value added tax, and excise tax) instead of 12 taxes which existed previously (Annex 2). Total tax burden of agricultural enterprises was reduced. Fixed agricultural tax became one of the principal taxes paid by agricultural enterprises. It is set as % of the value of land used. The tax rate is relatively low equaling 0.5% of as- sessed land value for arable lands and pastures, and 0.3% for perennial planta- tions (Gaidutskiy and Schmidt 2001). Land value is established by the authorities depending on the type and quality of land. On average, agricultural enterprises pay 20­23 hryvnia of fixed agricultural tax per hectare, equivalent to US$4­5 per hectare. With an average profit of about US$50 per hectare for major crops, the effective rate of taxation in 2001 was about 10%. In 2001 the share of taxes in total sales for agricultural producers was 8%, while in the industrial sector this rate was 4­5 times higher (UCEP 2001). Until January 1, 2001, agricultural enterprises could retain 30% of fixed agri- cultural tax. Payers of fixed agricultural tax were eligible for transferring 68% of the tax to the Pension Fund, 2% to the Social Insurance Fund, while the remain- ing 30% could be retained by the taxpayer on the condition that those funds are used for investment in agriculture. This was equivalent to a subsidy of approxi- mately 208 million hryvnia (Cramon Taubadel and Zorya 2000) in 1999. Agricultural enterprises are granted a VAT preference. This preference con- cerns agricultural goods and services of own production, including manufactured agro-food products for which own raw materials are used. The VAT payment due on these products32 can be retained by agricultural enterprises and be used 31Law of Ukraine No. 320 "On Fixed Agricultural Tax" of December 17, 1998. According to the Law "On Fixed Agricultural Tax," any enterprise receiving more that 50% of its gross receipts from sales of agricultural commodi- ties, is qualified as an agricultural producer and is eligible for fixed agricultural tax. Not eligible enterprises pay reg- ular taxes, including profit tax and social payments as it is presented in Annex 2. 32The VAT payment equals the difference between the VAT assessed on agricultural commodities sold and the VAT assessed on inputs purchased for production of these commodities. Domestic Support Measures 39 for purchase of inputs. This measure was introduced in order to compensate for unpaid direct payments due to lack of budgetary funds. According to consoli- dated financial statements of agricultural enterprises, the VAT subsidy equaled to 118 million hryvnia in 1999 and 582 million hryvnia in 2001 (Annex 2). This regime is in effect until January 1, 2004.33 It should be noted that this preference does not cover milk and meat sales as for these products a special tax-related sub- sidy exists, which is described below. The VAT paid by milk and meat processing plants is re-directed as per ton subsidy to meat and milk producers supplying these plants with raw materials. Agricultural enterprises received 236 million hryvnia in these subsidies in 1999, and 634 million in 2001 (Annex 2). Other tax privileges granted to agriculture: · a 100% exemption from the VAT of agricultural research services, provided that the research results are implemented; · import duty and tax exemptions for pesticides not produced in Ukraine and, until 2003, for imported diesel fuel (fuel preference concerned all fuel imports into Ukraine, not only those used for agricultural production).34 The new tax system envisaged establishment of clear and predictable rules of taxation of agricultural producers. The law "On Stimulation of Agricultural De- velopment for 2001­2004" explicitly stipulates that any amendments to current legislation leading to an increase in agricultural taxes are prohibited. According to the law "On Fixed Agricultural Tax," the terms of payment of fixed tax for all agri- cultural producers could not change until 1 January 2004. The effect of fixed agri- cultural tax has been recently prolonged until December 31, 2009, however, for this new period several changes concerning terms of tax payment and eligibility are fore- seen. Thus, an enterprise eligible for the fixed agricultural tax should receive not less than 75% of its gross receipts from sales of agricultural products (previously this share was set at 50%). The new system of agricultural taxation was expected to accomplish several goals. First, lower taxes were supposed to stimulate economic activity in the sector. Second, it was expected that economic growth will bring additional tax revenues that may com- pensate for decreases in tax revenues caused by reduction in taxation rates. Third, tax revenues were anticipated to rise because it would be difficult to evade fixed agricultural tax. This tax is based on the value of land, a resource that is very difficult to conceal. Fourth, because fixed tax is based on land values but not on value of sales or profits, it may reduce incentives to barter. Barter may lose its attractiveness as a method of tax eva- sion and additional revenues can be collected due to reduction in barter. Fifth, the sys- tem of taxation in Ukrainian agriculture could play not only purely fiscal role (tax collection) but also provide producer implicit subsidies through tax preferences. Sixth, 33Presidential Decree "On Support of Farms" of December 12, 1998. 34Tax exemption on imported diesel fuel was revoked in 2002. Although the Ministry of Agrarian Policy made a proposal to reinstate the preference for the second half of 2002, the Cabinet of Ministers and the Tax Administra- tion have opposed this proposal. 40 Achieving Ukraine's Agricultural Potential F I G U R E 3 . 1 Changes in Profits and Tax Liabilities for Agricultural Enterprises, US$ per hectare of Arable Land 60 40 20 0 1997 1998 1999 2000 2001 -20 -40 -60 Profits Gross taxes Net taxes Tax privileges Source: Annual Accounting Report of Agricultural Enterprises, Ministry of Agriculture F I G U R E 3 . 2 Changes in the Level and Structure of Gross Taxes of Agricultural Enterprises, 1998­2001 1 000 hryvnia, constant 1999 prices Net taxes VAT tax exemption VAT re-directed from processors 4 000 3 500 3 000 2 500 hryvnias 2 000 000 1 1 500 1 000 500 0 1998 1999 2000 2001 Source: USAID/UNDP Agricultural Policy for Human Development Project more efficient and transparent system of tax collection reduces the risk of harassment of agricultural producers by tax and local authorities. Figure 3.1 shows that in the years following the tax reform (1999­2001) producer tax liabilities per hectare of arable land have diminished considerably, while tax privileges increased. This coincided with an improvement in profitability of agricultural enter- prises, which could partly be due to the tax reform. Between 1998 (the year preceding the tax reform) and 2001, the following changes in tax collections from agricultural enterprises were observed (Figure 3.2): Domestic Support Measures 41 Real (adjusted for inflation) gross taxes of agricultural enterprises declined from 3.6 billion hryvnia in 1998 to 1.4 billion hryvnia in 2001, or by 61%. Tax privileges almost tripled in real terms due to introduction of VAT preference and an increase in the VAT re-directed from processors as milk and meat subsidy. The net taxes of agricultural enterprises (gross taxes minus tax benefits) declined in real terms by 85% in 2001 compared to 1998. The real value of collected fixed agricultural tax increased by 48% between 1999 and 2001, mostly due to higher compliance rates. Thus, agricultural enterprises paid 81% of fixed tax accrued in 2001 compared to 66% in 2000, and 36% in 1999. Rural households are not qualified as legal entities and are not eligible for paying VAT on agricultural products they sell. Households are not eligible for fixed agricultural tax either. They pay a tax on owned land, including land rented out, at an average rate of 50 hryvnia per ha. Agricultural Agricultural credit in the 1990s. During the 1990s agricultural producers in Ukraine Credit Policy were operating under tight credit constraints. Medium and long-term credits for agri- cultural producers were hardly available at all. Short-term credits were also in very short supply. There are several reasons for that. Agricultural producers' demand for funds has been limited by high real interest rates (Table 3.1). The supply of credit was low due to reluctance of commercial banks to lend to agri- cultural producers. From the creditors' point of view, the agricultural sector was not at- tractive for investment due to: low profitability of the agricultural sector; high level of debt owed by agricultural enterprises to the state and private lenders; lack of legal framework (mortgage laws) that allow for secure credit transactions; lack of secure and liquid collateral; state interference with the borrowers' financial and economic activities that in- creased the risk of lending, etc. short credit history of the borrowers; and long period of capital turnover in the agricultural sector due to seasonality in pro- duction and sales. T A B L E 3 . 1 Annual Average Interest Rates on Loans Extended in the Local Currency 1998­2002, % 1998 1999 2000 2001 2002 National Bank of Ukraine (NBU) refinance rate* 62 50 31 20 9 Interest rate of commercial banks** 55 53 40 32 25 Annual inflation rate 20 19 26 6 -0.6 *National Bank of Ukraine base rate for crediting commercial banks. **Average weighted interest rate for loans offered by commercial banks in domestic currency. Source: National Bank of Ukraine, State Committee of Ukraine for Statistics. 42 Achieving Ukraine's Agricultural Potential T A B L E 3 . 2 Average Nominal Commercial Interest Rate on Loans in 2000 and 2002 Sectors 2000 2002 Agriculture 44 27 Input Supply 40 n.a. Industry 39 n.a. Trade and Public Catering 36 27 Construction 35 30 Other 29 20 Source: National Bank of Ukraine As a result, the interest rates that banks charged agricultural producers were much higher than in other sectors of the economy. However, the situation changed somewhat by 2002 (Table 3.2). Recent changes in the agricultural credit policy. In order to establish a solid basis for the finance and credit market development in rural areas, the following measures were undertaken by the government in 1999­2001: land reform initiated in 1999, among other goals, envisaged provision of agri- cultural producers with secure sources of collateral for credits; agricultural enterprises began restructuring which may have contributed to im- proved sector efficiency and profitability in the first two years following the reform;35 debts of agricultural producers to the state were partly written off and partly re- structured; large-scale interventions in input and product markets were discontinued, which increased competition and established more predictable economic environment for lending; and the moratorium on bankruptcy procedures against agricultural enterprises was lifted. This simplified relations between creditors and borrowers, as well as strengthened security of creditor rights. In 2000, the government designed and implemented a program of partial compensa- tion of interest rates on commercial bank loans for agricultural producers. That same year, the compensation constituted 50% of the NBU refinance rate and 175 million hryvnia were allocated in the national budget for this purpose. Due to an initial cau- tious approach of commercial banks to lending to agriculture, only 50 million hryvnia were actually spent in 2000. This limited amount of subsidy, nevertheless, allowed to raise a substantial private credit for the sector. In 2000, 818 million hryvnia were lent to 4,150 agro-food borrowers, of which 3,800 (or 92%) were agricultural enterprises. 35In 1999 the average profitability of agricultural enterprises was officially estimated at -22.1%, and in 2000 it im- proved to 9%. However, after 2000 this tendency reversed with the profitability declining to 5% in 2001 and -1.9% in 2002. Domestic Support Measures 43 The latter also received the major part of the value of credits--455 million hryvnia (56%). In 2000, fifty-one commercial banks lent to agricultural enterprises under the partial interest rate compensation program.36 Despite initial concerns, the average re- payment rate was rather high (86%). The repayment rate by agricultural enterprises was 92%, which significantly increased the banks' confidence in the program. The partial interest rate compensation program was continued in 2001. About 157 million hryvnia were allocated from the national budget for these purposes.37 In 2001, the program was slightly modified. The compensation rate for agricultural com- modity producers and grain purchasing and processing enterprises was increased to 70% of the NBU discount rate.38 Agricultural producers participating in the program were allowed to set new separate accounts for settlements with the banks. Thus, agricultural producers that had their accounts "blocked" due to accumulated bad debts were also able to participate in the program. During 10 months of 2001, the size of credit ex- tended amounted to 2.8 billion hryvnia, which is 3.4 times greater than in 2000. In 2001, the number of commercial banks which took part in lending to the agro-indus- trial sector increased to 88 as compared to 51 in 2000.39 In 2001, the total number of agricultural borrowers increased 2.6 times, and amounted to more than 10,600 enti- ties. The number of agricultural enterprises borrowing credit increased 2.6 times, pri- vate farms 4.2 times, and household plots threefold. The share of individual farmers and household producers in the overall amount of borrowing, however, remains in- significant, i.e. only 6% and 0.2% respectively. The average size of a loan varied from 157, 000 hryvnia in agriculture40 to 1 million hryvnia in the food processing and agri- cultural machine manufacturing.41 Long-term credits accounted for 17% of the total amount of credits. Short-term credits were used for purchasing fuel and lubricants (36% of total), and fertilizers (19% of total). According to the estimates of the Ministry of Agrarian Policy, the rate of credit repayment in 2001 was 94%. Despite apparent success of subsidized credit program, several important issues re- main unresolved: Many commercial banks are still reluctant to deal with agricultural producers. One of the immediate problems, for example, is the lack of credit history of re- formed farm entities. Another problem is that agricultural producers usually do not meet the banks' requirements for collateral. The lack of land market makes it impossible to use the land as collateral. Other fixed assets are often obsolete or 36The major lenders were Bank Ukraina (25%), Aval (21%), Prominvestbank (16%), Ukrsotsbank (5%), Privatbank (5%), Nadra (3%) and Ukreximbank (3%). The lowest annual interest rate equaled 28%, the highest rate -60%. 37Law of Ukraine No. 2120-III "On the State Budget of Ukraine for 2001" of December 7, 2000. 38Resolution of the Cabinet of Ministers of Ukraine No. 59 "On Partial Compensation of Interest Rates of Com- mercial Banks Lending to Agricultural Commodity Producers and Other Enterprises of the Agro-industrial Com- plex" of January 27, 2001. 39The following banks lent more than half of the total credit: Aval (31%), PromInvestBank (13%) and PrivatBank (9%). In addition, banks lent 1.1 billion Hryvnia to the agro-industrial sector under general terms. 40In 2001, agricultural enterprises borrowed on average 172,000 hryvnia, private farmers 66,000 hryvnia, and own- ers of household plots 30,000 hryvnia. 41In 2001, the average loan to grain procurement enterprises equaled 821,000 hryvnia, to meat and milk processors 1.2 million hryvnia, to agricultural machinery producers 1.2 million hryvnia, and to sugar and beet seed plants 1.9 million hryvnia. 44 Achieving Ukraine's Agricultural Potential worn-out. In practice, only the future crop and agricultural machinery are ac- ceptable as collateral in Ukraine. Long and medium-term credit is still not available to agricultural producers. In the short-run, it is necessary to allocate part of the budget funds provided for the interest rate compensation for the creation of cooperative banks that may pool the risks of a number of agricultural borrowers and stimulate long-term financing. In the long-run, the problem of agricultural credit cannot be resolved through subsidized credit alone, without development of real estate and land market. Lack of modern title registry system and high transaction costs on land sales are major impediments to the development of a mortgage market. The existing morato- rium on agricultural land sales (until January 1, 2005) impedes creation of a modern agricultural credit system. Access of rural population to agricultural credit has an important social dimen- sion in Ukraine. Agricultural production is the major source of income for 32% of the Ukrainian population. Small-scale producers have very limited access to credit markets. The government's agricultural policy should be aimed not only at subsidizing agricultural production but also at the development of rural finance infrastruc- ture. In order to develop the finance and credit market in rural areas, it is neces- sary not only to involve commercial banks, but also to create national and regional cooperative banks, promote credit union development and a set of sup- portive rural finance institutions such as risk insurance systems and credit guar- antee programs. Consumer Measures In December 1991, the Ukrainian government announced a general price liberaliza- tion, and starting from 1992, wholesale and retail prices for food were freed. However, during this first year of price liberalization, the government implemented a number of measures to prevent sharp rises in food prices. Thus, it applied limits on increases in re- tail prices for some staple food products,42 and set maximum profit-to-cost ratios for a range of processed products. The government also continued to pay price difference compensation to processors and grain elevators.43 Nevertheless, the first year of price liberalization was marked by a significant rise in retail food prices, which increased 17-fold from December 1991 to December 1992. From 1993, the centralized price difference compensation was abolished, but some regions continued this compensation until 1996. The centralized controls on food 42Breads, groats, pastas, sugar, butter, animal fats, margarine and baby food. 43Under the centrally planned system, fixed food prices and normative marketing margins were complemented by the budgetary transfers to the processing sector and grain elevators. These transfers, called the "price difference com- pensation," were the main instrument for maintaining stable and low retail food prices. Price difference compensa- tion was meant to offset part of processors' costs for raw materials, and thereby to maintain not only low retail prices, but also high agricultural producer prices. Domestic Support Measures 45 prices, introduced at the beginning of 1992, were phased out in the course of the year for almost all foodstuffs, although restrictions were maintained for baby food and some types of bread products. With the abrupt impoverishment of the population at the start of reform, the Ukrainian government considered it politically important to prevent sharp rises in bread prices. Thus, centralized bread price controls existed in Ukraine until 1996, with the central government setting maximum processing profit-to-cost ratios for some basic breads and flour for mills and bakeries. Between 1996 and 2002, no centralized food consumer measures were imple- mented in Ukraine. Some measures may have been practiced at the levels of regions, particularly those with high unemployment and unfavorable social conditions. How- ever, no detailed information is available on the various regional practices. Regional administrations, for example, could implement price controls on the basis of anti- monopoly law when food processors and retailers were found to violate antimonopoly regulation.44 In connection with the "grain crisis" of 2003, regional administrations were temporarily authorized to set the limits on processor and retailer mark-ups for a range of basic foodstuffs (Chapter 3). Social assistance targeted to low-income groups can be regarded as an indirect type of food consumer support. In 2001, about 83% of the Ukrainian population spent less than 311 hryvnia per capita per month (about US$58), which is the official "living min- imum." The monthly per capita income threshold to be eligible for social assistance is set at 56 hryvnia (US$10).45 In 2001, approximately 6% of the Ukrainian population was registered as eligible for social assistance to low-income groups and 5% as disabled low-income persons eligible for assistance (Table 3.3). Aid was delivered both in the form of money (about US$4 and US$10 per year) and in-kind (about US$8 per year). Most probably, the bulk of money aid was spent for purchasing food, and the bulk of in-kind assistance was provided in food products. High rates of food price inflation persisted in Ukraine until the mid-1990s, result- ing in a growing share of household income being absorbed by food expenditures and falling per capita food consumption (Tables 3.4 and 3.5). A new surge in food prices followed in 1998, when Ukraine went through a financial crisis and felt the spill-over effects of the Russian crisis. In 1999­2001, Ukrainians spent over one half of their money income on food. The drastic rise in relative food prices led to stronger reliance on subsistence food production, which became not only an important source of food, but also a source of supplementary money income, particularly for rural families. In 2001, for example, Ukrainian households produced 77% of total meat in Ukraine, 73% of milk, 98% of potatoes, and 87% of vegetables. Households used the bulk of this pro- duction for their own consumption and for provision of their relatives and friends. Rise in food prices was certainly not the only factor causing growth in subsistence food pro- duction. More broadly, this process was driven by the rising unemployment and dete- riorating real incomes in Ukraine during the transition. Under these conditions, 44The Resolution of the Cabinet of Ministers of Ukraine No. 733 "On Pricing Under Conditions of Economic Reform" of October 21, 1994. 45As of the third quarter of 2001. 46 Achieving Ukraine's Agricultural Potential T A B L E 3 . 3 Selected Indicators of Social Assistance to Low-Income Groups in Ukraine, 1995­2001 1995 1996 1997 1998 1999 2000 2001 Total population, mid-year, thousands 51,730 51,330 50,890 50,500 50,110 49,700 49,300 Total number of registered low-income persons eligible for social assistance, thousands 2,557 2,416 2,788 2,872 2,891 2,835 2,922 as % of total population 4.9 4.7 5.5 5.7 5.8 5.7 5.9 of which the number of persons who received: money assistance 1,345 652 585 424 691 683 747 in-kind assistance 1,925 2,046 2,389 1,807 2,570 1,830 2,081 Average amount of assistance per person per year, hryvnias money assistance 931* 40 30 36 37 41 56 in-kind assistance 1378* 25 42 40 41 47 46 Total number of low-income persons eligible for social assistance by disability, thousands 1,818 3,478 3,304 3,065 3,408 3,428 2,675 as % of total population 3.5 6.8 6.5 6.1 6.8 6.9 5.4 Average amount of money assistance per person per year, hryvnias 171* 12 12 12 13 15 22 *Thousand Ukrainian karbovanets Source: State Committee of Ukraine for Statistics T A B L E 3 . 4 Share of Household Money Expenditures Spent on Food, Food Price and Money Income Indices, 1990­2001 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Share of household money expenditures spent on food, % 33* 42* n.a. n.a. 52 57 61 57 58 57 59 56 Retail food price index, December to December, % 104** 431** 1,790 12,180 470 250 120 110 122 126 128 108 Population's money income index, December to December, % n.a. n.a 1,160 2,656 858 492 152 124 111 114 140 126 *Share of total household expenditures spent on food **Annual average Source: State Committee of Ukraine for Statistics, CIS Statistical Committee T A B L E 3 . 5 Per Capita Consumption of Main Food Products in Ukraine, kg, 1990­2001 2001 as % 1990 1995 1998 1999 2000 2001 of 1990 Meat and meat products* 68 39 33 33 33 30 44 Milk and milk products 373 244 213 210 198 205 55 Eggs, pieces 272 171 154 163 164 180 66 Fish and fish products 17.5 3.6 5.9 7.2 8.3 11 63 Sugar 50 32 32 33 37 39 78 Vegetable oils 12 8 8 9 9 10 86 Potatoes 131 124 129 122 135 140 107 Vegetables and melons 102 97 94 96 101 105 103 Fruit and berries 47 33 28 22 29 26 55 Bread products 141 128 126 122 124 130 92 *Including fat and sub-products Source: State Committee of Ukraine for Statistics Domestic Support Measures 47 subsistence food production played and continues to play, a buffer role against the ad- verse social effects of economic adjustment. Overall Budgetary Transfers to the Agro-Food Sector In the analysis that follows, overall budgetary transfers to the agro-food sector include outlays through all ministries and agencies for the implementation of government mea- sures related to the agricultural and food sectors. In addition to transfers directed specif- ically to agricultural producers, this category includes allocations to general services, such as agricultural research and education, inspection services, infrastructure, market- ing and promotion. The budgetary transfers to the agro-food sector analyzed here also include support to the processing sector,46 as well as government outlays on social pro- grams in rural areas. In sum, this section presents as broad as possible an evaluation of fiscal cost of agro-food policies in Ukraine.47 Budgetary transfers to the agro-food sector contracted sharply in real terms at the be- ginning of the transition period and tended to decline since (Table 3.6). In constant prices, these transfers in 2001 amounted to only 7% of their level in 1992. This sharp fall re- flected first of all the systemic transformation of the Ukrainian economy with the state withdrawing itself from the all-embracing Soviet-type support of the sector. Contraction of public spending for the sector was also the result of a considerable reduction in fiscal revenues that the Ukrainian government had been facing since the start of the transition. A strong shift in overall budgetary transfers away from the agro-food sector was ob- served since the start of reform. Over one quarter of the state budget was spent on agro- food activities in 1992, which amounted to approximately 11% of the Ukrainian GDP. These shares dropped sharply in 1995 (to 3.7% and 1.7% respectively) when the gov- ernment committed itself to the macroeconomic stabilization program necessitating con- siderable budget austerity. Since then the share of the state budget allocated to the agro-food sector remained at about this level. Thus, during the most recent period, be- tween 1999 and 2001, the support to the agro-food sector placed a relatively small bur- den on the Ukrainian budget and on the overall economy, although there has been some increase in the expenditures in 2001. During these three recent years, the transfers to the agro-food sector averaged 2.7% of the state budget and 0.7% of the Ukrainian GDP. However, budgetary support in its narrow sense, meaning actual budgetary appro- priations, does not fully reflect the full cost of fiscal support to the agro-food sector. Since 46For example, price difference compensation to food processors in the first half of the 1990s. 47It is important to stress the difference in the scope of budgetary transfers presented in this section and the bud- getary transfers as reflected in the PSE and related indicators (analyzed in Chapter 5). The first and most important distinction is that budgetary component of the PSE does not include government expenditures related to market in- terventions, e.g. funds allocated to procurement agencies. These measures are accounted for in the PSE indirectly, through estimation of its Market Price Support component based on the gap between domestic and world prices. Inclusion of actual budgetary outlays on market interventions, together with Market Price Support Estimate would, therefore, create a double counting in the PSE. Another distinction is that budgetary component of the PSE, as well as of all PSE-related indicators, such as the General Services Support Estimate and the Total Support Estimate in- cludes only those budgetary transfers that are targeted specifically to agricultural producers and the agricultural sec- tor. For example, expenditures on social programs for rural areas are not considered in the PSE and related indicators. 48 Achieving Ukraine's Agricultural Potential T A B L E 3 . 6 Budgetary Transfers to the Agro-food Sector in 1992­2001 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Direct budgetary transfers to the agro-food sector*: in current prices, hryvnias million 5.4 81.4 1086.5 899.7 1269.1 872.5 943.2 935.1 1035.7 1741.5 in 1992 prices**, hryvnias million 5.4 0.8 2.1 0.6 0.6 0.4 0.4 0.3 0.3 0.4 in US$ million 2579.5 1794.2 3427.6 610.8 693.7 468.8 385.0 226.4 190.4 324.2 Direct budgetary transfers to the agro-food sector* as per cent of total budgetary expenditure 27.9 14.2 17.2 3.7 3.8 2.5 3.0 2.7 2.2 3.2 of GDP 10.7 5.5 9.0 1.7 1.6 0.9 0.9 0.7 0.6 0.9 Implicit budgetary transfers to the agro-food sector*** in current prices, hryvnias million 0.01 0.06 232.6 696.5 501.6 774.3 1261.8 2768.0 1771.0 1941.0 in 1992 prices**, hryvnias million 0.01 0.001 0.5 0.5 0.2 0.3 0.5 0.9 0.4 0.4 in US$ million 2.6 1.2 733.8 472.8 274.2 416.0 515.1 670.2 325.5 361.3 Overall (direct and implicit) budgetary transfers to the agro-food sector in current prices, hryvnias million 5.4 81.5 1319.2 1596.3 1770.7 1646.8 2205.0 3703.1 2806.7 3682.5 in 1992 prices**, hryvnias million 5.4 0.8 2.6 1.1 0.9 0.7 0.8 1.2 0.7 0.8 in US$ million 2582.1 1795.4 4161.4 1083.6 967.9 884.9 900.2 896.5 515.9 685.5 as per cent of GDP 10.7 5.5 11.0 2.9 2.2 1.8 2.1 2.8 1.6 1.8 *Expenditures for forestry, fishery and administration not included. **CPI was used as a deflator to estimate constant price series. ***Estimated tax preferences, amounts of forgiven debt on state credit, taxes and other charges (obligatory payments). Source: OECD the start of reforms, substantial assistance was provided through various implicit fiscal transfers, which actually represented the budgetary revenue foregone in favor of the agri- cultural sector. These transfers included various tax benefits granted to producers; for- giveness (writing off and restructuring) of debt on taxes and obligatory payments to state social security, pension and unemployment funds; and forgiveness (writing off and re- structuring) of debt on the state commodity credit. As Table 3.6 shows, in the mid-1990s implicit fiscal transfers to producers became almost as important as direct budgetary transfers and during the most recent period even exceeded the latter. Taking into account this implicit type of support, the share of overall (direct and implicit) budgetary trans- fers to the agro-food sector in Ukraine reached about 2% of GDP in 1999­2001. The composition of direct budgetary transfers to the agro-food sector during the transition period showed marked annual fluctuations (Table 3.7 and Figure 3.3). Never- theless, until 1999, there has been a visible trend towards the reduction of outlays linked with market price support (expenditures for state procurements and output payments). With the share of this spending falling, "green box"-type measures, including general services and support for investments, have been gaining higher importance. This trend was reversed in 2000­2001, when the increase in per ton payments48 and input subsi- dies, combined with the fall in outlays for general services, resulted in some decline in the share of "green box" expenditures. 48It should be noted that since 1998, per ton payments are provided through redirecting VAT due from processors to agricultural producers supplying the plants with raw materials. Domestic Support Measures 49 T A B L E 3 . 7 Composition of Direct Budgetary Transfers to the Agro-food Sector in 1992­2001 (in %) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Direct budgetary transfers to the agro-food sector 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Allocations for state purchases and per tonne payments* 78.1 85.3 82.1 38.1 25.4 17.0 21.9 25.1 39.3 36.7 Subsidies for variable inputs and services 0.4 0.7 1.0 3.7 14.3 3.2 1.6 2.0 6.5 7.8 Capital grants and fixed inputs subsidies 7.9 5.9 5.5 3.8 11.1 18.6 22.0 8.8 3.4 12.0 General services** 13.6 8.1 11.4 48.5 49.0 58.1 54.2 63.6 41.3 33.2 Miscellaneous 0.0 0.0 0.0 5.9 0.2 3.1 0.3 0.5 9.5 10.4 *Including per tonne payments provided from VAT returns in 1998­2001 and price difference compensation to the processing sector in 1992­1994. **Agricultural research and education, inspection services, infrastructure, marketing and promotion. Source: OECD F I G U R E 3 . 3 Composition of Direct Budgetary Transfers to the Agro-food Sector in 1992­2001 (%) 100% Other payments 80% General Services 60% 40% Capital grants and fixed inputs Variable inputs and services 20% State purchases and price regulation 0% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: OECD Calculations One question arising in the analysis of budgetary transfers is how they are distributed between the two main categories of Ukrainian producers, i.e. former collective agricultural enterprises and individual households. More specifically, the question is whether there are biases against the small-scale production in allocation of budgetary funds, and whether these funds mainly reach former collective agricultural enterprises. The latter implicitly asks if the budgetary assistance is channeled predominantly to the least efficient recipients. 50 Achieving Ukraine's Agricultural Potential In general, the official government documents in Ukraine do not contain provisions excluding small household producers from the government's support. Moreover, for some measures, it is stated explicitly that all types of producers are eligible for assistance. This first of all concerns state purchases and other price regulation measures. Before 1996, when the Ukrainian government continued to practice traditional procurements, all producers delivering products to procurement agencies received procurement price, and were also eligible for input subsidy and per ton payments (for products for which these kinds of assistance were provided). Two main currently existing price support measures, per ton subsidy to milk and meat producers (from the processor VAT) and sugar quota, are also provided to all types of producers, but again on the condition of delivery to specified processing plants. Therefore, it is reasonable to assume that the share of agricultural enterprises and households in total deliveries for processing would roughly reflect the distribution of budgetary outlays on price support between these pro- ducer groups. Thus, in 2000­2002, agricultural enterprises accounted for 48% of total deliveries of meat for processing and households for the remaining 52%, these shares for milk were 50% and 50%, and for sugar beet 80% and 20% respectively. These fig- ures suggest that currently households play an important role as suppliers of the pro- cessing industry in Ukraine, and therefore, as possible beneficiaries of price support. The currently implemented interest rate compensation program is also formally ac- cessible to all types of agricultural borrowers. However, as mentioned earlier, small-scale producers account for only small shares of borrowings under this program. Limited par- ticipation of small producers is explained by general factors impeding commercial banks to lend to small borrowers, and small borrowers on their part, to make recourse to credit. In order to make credit assistance effectively accessible to small producers, the govern- ment would need to develop facilities specifically targeted to this type of borrowers. With regard to other principal types of budgetary assistance, such as implicit support through debt write-offs or preferential taxation, this support is entirely oriented to the for- mer collective agricultural enterprises. To what extent this assistance favors those enter- prises that are non-efficient and non-reforming versus those that demonstrate improved efficiency and have managed to initiate business restructuring, is an open question which needs a special analysis. The most recent debt write offs and rescheduling in 2000, for ex- ample, were foreseen only for those agricultural enterprises that would undertake to re- structure. To what extent this condition was actually applied by the local government officials responsible for implementation of this program and whether the agricultural en- terprises that were granted the debt write-off have in fact undertaken substantive restruc- turing, needs to be answered as well. Most likely, concrete practices varied in each locality. In conclusion, the incidence of budgetary support in Ukraine with respect to dif- ferent producer types is an empirical issue which deserves a special study. Each policy instrument needs to be analyzed in terms of its actual implementation, particularly at local levels, in order to trace out actual beneficiaries of support. The analysis, however, should not be limited only by understanding the incidence of support. It would be even more important, to evaluate on this basis the effects of support in terms of raising in- comes of various producer groups in Ukraine. C H A P T E R 4 Trade Policy and WTO Accession T he Ukrainian agro-food sector is weakly integrated with the international trade system as indicated by low ratio of agro-food exports and imports to Gross Agricultural Output (GAO). For example, in 2000 the ratio of agro- food exports to GAO was 14% in Ukraine compared with 25% for Poland and 53% for France and Germany (Table 4.1). Given Ukraine's agricultural resources, agricultural trade policy is of critical importance for future agricultural growth. Ukraine's integra- tion into the WTO system is an essential pre-condition for the country to fully achieve its agricultural potential on international markets. Overall Agricultural Trade Performance Agro-food exports have traditionally accounted for a large share of Ukraine's total ex- ports. Since independence, Ukraine has almost constantly been a net exporter of agro- food products, with the exception of the beginning of the 1990s (Figure 4.1). However, the trade performance has varied quite strongly, due mainly to the following factors: shifts in trade relationships with major partners, in particular with Russia; changes in trade policy (switching from supporting imports and impeding exports to protecting domestic producers through tariff and non-tariff import barriers); fluctuations in the volume of agricultural production, partly resulting from shifts in domestic policy mea- sures; and, finally, changes in macroeconomic policy, in particular exchange rate pol- icy. As a result, over the last decade, four phases can be distinguished in Ukrainian agro-food trade: In 1992­1993, agro-food exports decreased and the net balance was negative. This resulted from the loss of traditional markets following the disintegration of the former Soviet Union, a fall in agricultural production, and government poli- cies restricting agro-food exports to ensure adequate food supplies to the domes- tic market. In 1994­1996, the situation improved as most quantitative restrictions on exports were lifted and trade links with other NIS countries were partly re-established. As a result, agro-food exports increased and the agro-food balance of trade improved 51 52 Achieving Ukraine's Agricultural Potential T A B L E 4 . 1 The Share of Agricultural Exports in GAO and AGVA in Ukraine and Selected Countries in 2000, % Net agro-food Net agro-food Agro-food Agro-food exports/GAO exports/AGVA exports/GAO exports/AGVA Ukraine 4.7 8.4 14.0 25.0 France 14.0 27.4 53.0 105.0 Germany -22.8 -52.9 53.0 122.0 EU-15(1) -3.2 -6.0 18.0 34.0 USA 2.4 6.6 28.0 77.0 Poland -5.0 -10.6 25.0 53.0 Bulgaria 5.2 7.1 16.0 21.0 1. Only trade with the third countries taken into account. Source: Own calculations based on the WTO and Eurostat data. F I G U R E 4 . 1 Agricultural Trade in Ukraine, 1992­2002 Agro-food exports Agro-food imports Balance US$ million US$ million 3100 3100 2900 2900 2700 2700 2500 2500 2300 2300 2100 2100 1900 1900 1700 1700 1500 1500 1300 1300 1100 1100 900 900 700 700 500 500 300 300 100 100 -100 -100 -300 -300 -500 -500 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: State Committee of Ukraine for Statistics significantly. By 1996, agro-food exports rose to US$3.0 billion, accounting for 21% of total merchandise exports, and the positive agro-food trade balance rose to US$1.6 billion. In 1997­2000, Ukrainian agro-food exports were strongly affected by several neg- ative factors. In 1996/97, Russia, Ukraine's most important export market, im- posed a number of trade barriers on imports from Ukraine. Then, the 1998 financial crisis in Russia and the strong depreciation of the ruble undermined Ukrainian competitiveness on the Russian market. Moreover, a series of poor grain harvests between 1998 and 2000 reduced the availability of grains for exports. As a result, the total value of agro-food exports was approximately half compared to Trade Policy and WTO Accession 53 the record 1996 level, the share of agro-food exports in the total fell to 7% and the positive agro-food trade balance shrank to around US$0.5 billion in 2000. In 2001 and 2002, the situation improved again. Good weather conditions, some progress in farm restructuring, and new agricultural policy measures easing farm- ers' access to credit, stimulated production, in particular of grains and oil seeds. As a result, agro-food exports increased to US$2.4 billion and net exports to about US$1.3 billion in 2002. Composition of agro-food trade Ukraine is a net exporter of all major temperate zone agro-food products (Table 4.2). However, the quantities exported of various products have fluctuated strongly and the commodity structure of exports has changed significantly over the last decade. In the first half of the 1990s, exports were dominated by products which used to be exported within the Soviet economy to other Soviet republics, in particular to Russia: sugar, alcohol, ce- reals, meat products, flour, fats and oils. Until 1997, these exports were mostly under- taken within bilateral agreements between Russia and Ukraine, quite often on barter terms. Still in 1995 the value of exports of sugar and alcohol beverages alone amounted to above US $1 billion, accounting for almost 40% of total Ukraine's agro-food exports. Since then, changes in trade arrangements with Russia, stronger trade links with countries other than NIS (see below), and more market-oriented domestic policies have enabled changes in the structure of agro-food trade to better reflect Ukraine's compar- ative advantages. For example, due to changes in the trade regime between Ukraine and Russia and a fall in world market prices for sugar, making Ukraine's sugar exports to Russia uncompetitive, Ukraine's sugar exports decreased from US$899 million in 1995 to just US$86 million in 2001. In fact, in 2001 Ukraine became a net importer of sugar (Table 4.2). In turn, the share of exports of cereals, oil seeds and sunflower oil has in- creased. In 2001, exports of these products earned US$0.9 billion and accounted for 47% of Ukraine's total agro-food exports (Figure 4.2). The total value of Ukrainian agro-food imports has been more stable than exports. The main products imported in 2001 were tobacco and products, sugar and confec- T A B L E 4 . 2 Ukraine's Net Exports of Major Agro-food Products in 1995­2001, US$ million 1995 1996 1997 1998 1999 2000 2001 Meat and products 192 142 176 92 69 172 84 Dairy products 266 170 92 53 47 126 244 Cereals 103 349 108 295 487 5 434 Oil seeds -9 172 233 185 105 167 120 Animal and vegetable fats and oils 137 149 82 38 37 179 139 Sugar and sugar confectionery 736 366 299 66 27 28 -47 Beverages and spirits 299 356 43 -36 -7 5 35 Tobacco and products -318 -116 -147 -175 -90 -67 -117 Source: State Committee of Ukraine for Statistics. 54 Achieving Ukraine's Agricultural Potential F I G U R E 4 . 2 Ukraine's Main Agro-food Exports, 2001 Other products 20% Cereals 27% Spirits and beverages 4% Sugar and confectionery 5% Oil seeds 8% Milk products 15% Meat and products 9% Sunflower oil 12% Source: State Committee of Ukraine for Statistics F I G U R E 4 . 3 Main Agro-food Imports, 2001 Tobacco and products Other products 14% 31% Sugar and confectionery 12% Spirits and beverages 3% Coffee, tea, spices Fats and oils 5% 8% Fruit Cocoa and products 6% 7% Meat and products Fish and products 7% 7% Source: State Committee of Ukraine for Statistics. tionery, and fats and oils, accounting in total for 34% of Ukraine's agro-food imports in 2001 (Figure 4.3). Destination and Origin of Agro-food trade Ukraine is in the process of reorienting its trade links with its main trading partners. While the NIS countries remain Ukraine's major export market, the share of these countries in Ukraine's total agro-food exports declined from 74% in 1996 to 46% in Trade Policy and WTO Accession 55 2001. During the same period, the share of all other major regions in Ukraine's agro- food exports increased. The European Union has become Ukraine's second largest ex- port market with the share increasing from 9% in 1996 to 18% in 2001. However, it has to be noted that the increase in absolute values of agro-food exports to countries other than the NIS was small and the impressive changes in the structure of Ukraine's agro-food exports were largely due to a significant fall in agro-food exports to the NIS countries (Figure 4.4). The fall in agro-food exports to the NIS countries was mostly due to a dramatic de- cline in exports to Russia from US$1.6 billion in 1996 to US$0.7 billion in 2001. As a result, Russia's share in Ukraine's total agro-food exports declined from 51% to 37%, respectively. However, Russia remained an important market for dairy products (but- ter, cheese, canned dairy products), frozen cattle meat, sunflower oil, confectionery, and tobacco products. In 2001 Spain was the second largest market for Ukraine's agro-food exports with a share of 6%. Countries such as Spain, Saudi Arabia and Morocco have become the main new outlets for Ukraine's grain exports. In contrast to the evolution on the export side, the share of the NIS countries in Ukraine's total agro-food imports increased from just 6% in 1996 to 22% in 2001 while the share of imports from other major regions such as EU, CEE, North America and South and Central America, decreased (Figure 4.5). Russia has become the main sup- plier, increasing its share from just 3% in 1996 to 13% in 2001. In 2001, the main products imported from Russia were fish, confectioneries, and tobacco products. The USA was the second largest supplier, in particular of poultry meat, but its share de- F I G U R E 4 . 4 Ukraine's Agro-food Exports by Regions in 1996 and 2001, US$ Million NIS CEECs EU Middle East Africa Other countries 3,200 48.8 3,000 42.7 146.3 2,800 268.3 2,600 2,400 280.5 2,200 2,000 1,800 85.7 151.4 1,600 206.1 1,400 1,200 333.8 2,262.2 1,000 213.4 800 600 400 833.5 200 0 1996 2001 Source: State Committee of Ukraine for Statistics. 56 Achieving Ukraine's Agricultural Potential F I G U R E 4 . 5 Ukraine's Agro-food Imports by Regions in 1996 and 2001, US$ Million NIS CEECs EU South and Central America North America Other countries 1,500 1,400 180.0 1,300 1,200 209.0 1,100 1,000 223.0 900 266.0 106.0 800 144.0 700 600 446.0 230.0 500 400 175.0 300 200 260.0 100 248.0 87.0 0 1996 2001 Source: State Committee of Ukraine for Statistics. creased from 14% in 1996 to 9% in 2001. Other major exporters to the Ukrainian mar- ket include Brazil (raw sugar), Germany (tobacco products, fats and oils) and the Netherlands (fat and tobacco products). The diverging trends in Ukraine's agro-food trade with the NIS and other coun- tries are reflected in changes in the balance of the agro-food trade with these two groups of countries. While the positive balance with the NIS countries decreased sharply be- tween 1996 and 1998 and since then stabilized at around US$0.5­0.6 billion, the neg- ative balance with other countries diminished and in 2001 turned positive. The diversification of Ukraine's export markets is a positive development. Recent changes have been partly enforced by the growing importance of market-based trans- actions, rather than barter. For example the share of barter agreements in Ukraine's total agro-food exports fell from 9.6% in 1997 to just 0.4% in 2000 and remained negligi- ble since then. Other factors include the fall in Russian agro-food imports following the 1998 financial crisis, and the growing competitiveness of the Russian agro-food sector. In a more competitive environment, Russian importers selected the least costly suppli- ers rather than suppliers imposed by the government-fixed barter arrangements. More- over, the recovery of Russian agriculture over the last three years (growth in production by 20% between 1999 and 2001) and the ongoing adjustments in Russian food pro- cessing industry, suggests that Ukraine may lose its competitive advantage over the Russian agro-food sector, if reforms in Ukraine are not accelerated. There are a large number of similarities between the Russian and Ukrainian agro- food sectors. Farm structures in both countries are, and will probably remain, domi- Trade Policy and WTO Accession 57 nated by agricultural enterprises. The agro-climatic conditions in the major agricultural areas in Russia are quite similar to those in Ukraine. Both countries tend to have a com- parative advantage in crop production, in particular for grains and oil seeds, and a com- parative disadvantage in livestock production (this is more true for Russia than for Ukraine). These similarities would suggest that the agro-food sectors in the two coun- tries will develop along similar lines to create competitive, rather than complementary, structures. Therefore, Ukraine and Russia will probably compete on third markets for their grain and oil seed exports and there will be rather limited potential for growth in mutual trade in agro-food products. This reinforces the argument for Ukraine to de- velop new export markets in third countries, in particular in the European Union, but also in the Middle East, North Africa and Asia. Ukraine's future accession to WTO should further contribute to this process. Evolution of Trade Policy General Measures The basic rules governing foreign trade activities are set out in the law "On Foreign Eco- nomic Activities" voted in July 1991. The law is underpinned by a set of Government and National Bank of Ukraine resolutions and, in principle, establishes a liberal trade regime within which any Ukrainian resident may sell or purchase products or services from abroad. Import/export contracts, as is the case for any other contracts under the law, are subject to international arbitration (OECD 2001). As a general rule, imports are subject to: customs fees; an import VAT of 20%; and excise taxes for the importation of certain luxury products. No import duties are levied on imports from countries with which Ukraine has concluded free trade agreements, mainly CIS countries (see below). Reduced rates apply to a large number of countries with which Ukraine has concluded most favored nation treatment agreements. Some imports are exempt from VAT, especially imports from the Russian Federation under the Free Trade Agreement, but also imports into some free economic zones. There are a large number of non-tariff barriers which still impede imports into Ukraine, particularly for agro-food products. For example, there are registration re- quirements for many types of transactions with foreign parties, especially counter-trade contracts, contracts with state enterprises, and joint investment agreements. For a few commodities, including agro-food products (see below), a system of "indicative prices" is imposed. If these price levels are not observed, Ukrainian customs refuse to clear such goods. Moreover, the State Committee of Ukraine for Standardization (Derzhstandard) imposes numerous technical standards and certification requirements on many imports. Certification procedures are viewed as non-transparent, lengthy, and very expensive. For many products, pre-market certification procedures require mandatory visits of the committee officials to exporting factories at the cost of the exporter. The committee usually fails to recognize foreign product certificates even if issued in accordance with 58 Achieving Ukraine's Agricultural Potential international standards applied by organizations to which Ukraine belongs, such as the International Standards Organization (ISO) (OECD 2001). Since independence, three phases in border protection against agro-food imports can Import Measures be identified: 1991­1995 During this period, a wide range of the centrally planned economy measures were still applied, but new regulations brought the agro-food import regime closer to market rules. For example, imports of meat, dairy products, eggs, animal foodstuffs, cereals and sugar were still subject to quotas and licenses. Laws and Government's Decrees adopted in 1992 and 1993, however, established a relatively low tariff regime on agro-food im- ports. In fact, the Decree of the Cabinet of Ministers of January 1993 introduced ad- valorem import duties at a moderate rate of 5­10% for the most important agro-food products (Table 4.3). However, high excise taxes were applied between 1993 and 1995 for several im- ported agro-food products such as liquors, beer, chocolate, sturgeon and salmon caviar, seafood and fish delicacies and tobacco. The rates varied between 14­90% and were four times higher than that for similar domestic products. In 1996, the range of prod- ucts covered by excise taxes was curtailed to beer, tobacco products and liquors. 1996­1999 The strong increase in agro-food imports in 1995 and 1996 (see above) pushed the Government to strengthen border protection against agro-food imports. While the list of agro-food products covered by import quotas and licenses was substantially shortened in 1996, several regulations adopted by the Cabinet of Ministers in the same year brought higher ad valorem duties and combined them with specific du- ties. Tariffs on the majority of products were further increased in 1997. As a result, tariffs for example, on sunflower seeds increased from 2% in 1995 to 50% (but not less than 0.5 ECU/kg) in 1997 and on beef, pork and poultry from 5% to 30% (but not less than 1 ECU/kg for beef and pork and 1.5 ECU/kg for poultry) (Table 4.3). When recalculated in ad valorem terms, specific tariffs were very high. For example, the ad valorem equivalent of the specific tariff at 1.5 ECU/kg for poultry and at 0.5 ECU/kg for sunflower seeds were as high as 177% and 253%, respectively, in 1998 (Table 4.4). Such a policy contributed to a substantial fall in agro-food imports in 1997­1999 (see above) and encouraged importers to seek loopholes in existing legislation. In ac- cordance with the Decree of the Cabinet of Ministers "On regime of foreign invest- ments" of May 1993, joint ventures and their subsidiaries operating in Ukraine were entitled to duty-free imports. In fact, according to estimates by the Ukrainian Ministry of Economy, during 1998­1999 as much as 24% of total agro-food products were im- ported duty-free through joint ventures. To avoid further losses for the Ukrainian bud- get, a new legislation voted in February 2000 cancelled this privilege. As a result, Trade Policy and WTO Accession 59 0.05 2001 12.07.01 2671-III No /kg6 Law less ex- Ukraine) not 0.05 20 10.05.10 exclud- 2001 05.04.01 2371-III of but (Customs /t6 0.5 No 12.06.0010 Law Tariff /piece6 30%, than cluding /kg6 ing of 1935 No. 1 1 1.5 0.8 0.05 0.2 0.5 0.15 40 20 1998 Cabinet Ministers the Regulation of ECU/kg ECU/kg ECU/kg ECU/kg ECU/kg ECU/kg ECU/t excluding 10.01.909100 ECU/t ECU/kg ECU/kg 09.12.98 0.05 less 1 less 1 less 1,5 less 1.5 less 0.8 less less 0.2 less less less less 0.5 less 0.15 less 0.3 40 20 20 not not not not not not not not not not not not not 1997 17.07.97 468/97-BP but ECU/kg but ECU/kg but ECU/kg but ECU/kg but ECU/kg but ECU/piece but ECU/kg but ECU/t but ECU/t but ECU/t but ECU/kg but ECU/kg but ECU/kg Law No 30%, than 30%, than 30%, than 50%, than 20%, than 30%, than 50%, than 30%, than 30%, than 30%, than 50%, than 30%, than 50%, than 1993­2002 of 1378 less 0.4 less 0.5 less 0.12 less 0.02 less 0.01 less 0.01 less 0.15 less 0.2 No. not not not not not not not not 1996 Cabinet Ministers but ECU/kg but ECU/kg but ECU/kg but ECU/kg but ECU/kg but ECU/kg but ECU/kg but ECU/kg Products, the Regulation of 08.11.96 30%, than 30%, than 20%, than 20%, than 10%, than 20%, than 30%, than 50%, than applied. is of Agro-food 1221 less 0.16 tariff No. no 1996 Cabinet Ministers ECU/kg the Selected Regulation of previous 05.10.96 50%,but than the on and of 94 less 0.7 less 1 less 0.8 less 40 Duties No. not not not not changed 1996 Cabinet Ministers but ECU/kg but ECU/kg but ECU/kg but ECU/t not Import the Regulation of Regulations. 16.01.96 30%, than 30%, than 30%, than 5% 15%, than was and MFN tariff 4-93 Laws of the No. 5% 5% 5% 5% 5% 5% 2% that Tariff kraine's 1993 Cabinet 10% 10% 10% 10% 10% 10% Ministers Decree the of means Custom 3U 11.01.93, 4. space LE beef Ukrainian curd and sugar Blank TAB Frozen Pork Poultry meat Butter Cheese and Eggs Potatoes Wheat Barley Maize Sunflower seeds Fats oils Raw Note: Source: 60 Achieving Ukraine's Agricultural Potential T A B L E 4 . 4 Ukraine's MFN Import Tariffs on Selected Agro-food Products in Ad Valorem Terms, 1993­2001 Wheat Maize Barley Sunflower Sugar Beef Pigmeat Poultry Eggs 1993 10 10 10 2 10 5 5 5 5 1994 10 10 10 2 10 5 5 5 5 1995 10 10 10 2 10 5 5 5 5 1996 25 10 12 5 17 9 9 59 8 1997 63 20 25 136 90 57 33 82 56 1998 58 30 33 253 130 72 67 177 113 1999 51 30 28 241 160 91 89 134 8 2000 39 30 19 287 125 75 62 149 6 2001 44 30 20 263 108 56 52 137 29 Source: Table 4.3 and OECD PSE/CSE data base for Ukraine Note: In all cases, these are MFN tariffs expressed in ad valorem terms. Therefore, they do not reflect Ukraine's regional and bilateral trade agreements providing preferential access to Ukraine's market and/or loopholes in the existing legislation allowing for imports at zero or low tariffs. For the period 1993­1995, ad valorem tariffs at the levels officially announced are included. Between 1996 and 2001, for those products for which the so-called "combined tariffs" were applied (e.g. 30%, but not less than ECU 100 per ton), specific components were converted into their ad valorem equivalents according to the formula: (specific tariff/reference price as derived from the PSE data base)*100. In most cases specific components were higher than announced ad valorem tariffs, therefore with some exceptions (e.g. ad valorem import tariffs on maize between 1998 and 2001 were higher than ad valorem equivalents of specific duties) ad valorem equivalents of specific tariffs were included in the Table. For the period 1999­2001, specific tariffs were converted into their ad valorem equivalents according to the same formula as above. Under the formula applied, changes in the calculated ad valorem equivalents of specific tariffs reflect both changes in the specific tariffs and fluctuations in the reference prices. imports of selected products fell substantially. In particular, poultry imports fell from US$87 million in 1999 to US$18 million in 2000. To ease imports of selected products considered essential either for domestic con- sumers or processors, in 1997 the Government introduced so-called "critical imports list" of products benefiting from zero tariff and no VAT on imports. These were such products as breeding cattle, breeding poultry, some species of fish, cashew nuts, soybean meal, certain vegetable fats, cocoa beans, fish meal and some other foodstuffs. At the end of 1999, cereals for human consumption were also added to this list. The list was abolished in June 2000. Between 1996 and 1998, a minimal customs valuation was applied for imports of meat, dairy products, cereals, fruit and vegetables to avoid underreporting of prices de- clared. This measure was gradually discontinued in 1999 and 2000. 2000­2002 In this period tariffs remained at high levels (Table 4.3), but some attempts have been made to make non-tariff measures more transparent. The vast majority of agro-food im- ports are currently charged with specific duty (64% of all 4-digit tariff lines related to agro-food products, 1­24 groups of the CN) or with combined ad valorem and specific duty (21% of the total) (Figure 4.6 ). In July 2000, Ukraine's Government introduced a tariff quota on raw sugar imports at the level of 260,000 tons. The ad valorem duty within the quota was fixed at 1% of Trade Policy and WTO Accession 61 F I G U R E 4 . 6 Distribution of Ukraine's Import Tariff Rates on Agro-food Products in 2001 5 % duty 10 % duty (4.9%) Less than 5 % duty (3%) (0.1%) 20 % duty (0.2 %) 30 % duty (0.1%) Zero rate duty (7.1%) Combined duty Specific duty (20.9%) (64%) Note: Four digit tariff lines within 1­24 groups of the Combined Nomenclature. Source: The Law of Ukraine "On Customs Tariff of Ukraine" No. 2371 as of April 5, 2001. the customs value, but not less than 65/ton. Imports within the quota could be made between July 4, 2000 and September 1, 2000. Duties for white sugar and raw sugar im- ports above quota and for all import transactions after September 1, 2000 were fixed at 50%, but not less than 6300/ton. Almost the same terms of sugar imports were fixed for 2001 by the law "On import of cane raw sugar into Ukraine in 2001." In 2002, no quota for sugar imports was announced, meaning that all sugar imports should be charged with a regular duty of 50%, but not less than 6300/ton. In 2003, the Govern- ment implemented two raw sugar TRQs, amounting to 360 000 and 200 000 tons, with different import regimes. For 2004, the TRQ is to be set at 125 000 tons with in- quota tariff of 630/ton. The over-quota imports would be charged at regular rates, the same as in previous years. Tariff quota on sugar imports became a contentious issue in Ukraine's WTO accession negotiations (see below). Table 4.4, showing the evolution of MFN tariffs in Ukraine between 1993 and 2001, confirms a steep increase in tariffs in 1997 and 1998 followed by some stabiliza- tion between 1999 and 2001. The specific duties in ad valorem terms are very high and for sunflower, sugar and poultry meat are well above 100%. In addition to tariffs, Ukraine applies a number of non-tariff barriers, including quotas, licenses and import bans, which quite often lack transparency and impose additional transaction costs on importers. Between July 1997 and December 2002, the Government established an annual quota for imports of livestock products. The quota should not exceed 10% of the previous year's domestic production of beef, pork, and selected types of mutton and poultry meat. However, actual meat imports were low and did not exceed 1­6% of domestic production between 1997 and 2001. 62 Achieving Ukraine's Agricultural Potential Therefore, the quota was not constraining imports and the system was discontinued in January 2003. Moreover, in line with the Government regulation of April 1998, importers of frozen fish, meat and by-products, cut flowers, rice, flour, butter, margarine, sugar, con- fectionery, pasta, pastry, and juices were obliged to submit a so-called "preliminary cus- toms declaration" and to pay a deposit to the special account of the customs office. The deposit should reflect the value of taxes and duties to be paid on imports of these prod- ucts. In March 2002, the range of products covered by this requirement slightly changed and currently includes frozen fish, dried and smoked fish, meat and by-products, cut flowers, liquors, sugar, and tobacco products. The spread of BSE and foot-and-mouth (FMD) disease in the European Union in 2000/2001 caused Ukraine to reinforce sanitary restrictions on meat imports. In line with the Presidential Decree "On Urgent Measures to Secure the Stable Epizootic Sit- uation in Ukraine" dated March 22, 2001, Ukraine adopted new veterinary rules which prohibited imports of animals and meat products from countries affected by "danger- ous infectious diseases." Imports of meat and other livestock products from selected EU countries were banned. Also in line with these regulations, imports of poultry meat from the USA were banned at the end of January 2002. As long as Ukraine preserves its net exporter position on agro-food products, high bor- der protection, as discussed above, is not transmitted to domestic prices. However, if do- mestic supply falls below domestic demand for certain products, imports of these products increase and drive domestic prices up to the level of world market prices, plus the rate of border protection. This occurred, for example, in 2000 and 2003 when grain production fell substantially due to disastrous weather conditions (for a more detailed discussion on this situation, see Annex 4). Thus, prices exhibit strong fluctuations depending on Ukraine's net export or net import position. Ukraine's WTO accession should result in the lower- ing of border protection and in a reduction of such price-triggering. Export Measures Until 1994, Ukraine applied Soviet-type export policy measures. Exports were subject to stringent quota and licensing systems. In January 1993, the Government Decree "On Quota and Licensing of Goods and Services Exports" expanded the range of products covered by quantitative restrictions on exports and extended it to cover all basic agro- food products. At the same time, another Decree "On Export Customs Duty in 1993" introduced a system of export duties on 53 groups of goods. The rate for all major agro- food products was 30% (Table 4.5). While export taxes were abolished at the end of 1993, export quota and licensing remained almost unchanged until October 1994 when the list of agro-food products covered by these restrictions was substantially shortened. In 1995, the list was further reduced and the only agro-food products covered were cereals. From 1996 onwards there have been no agro-food products covered by this policy measure. While quanti- tative export restrictions are still applied to bilateral agreements between Ukraine and other countries, the number of such cases has diminished since the mid-1990s. In the second half of the 1990s, export duties were reintroduced for a limited num- ber of agro-food products. In 1996, duties were imposed on exports of live cattle, live Trade Policy and WTO Accession 63 T A B L E 4 . 5 Export Duties for Agro-food Products in Ukraine Between 1993 and 2002, % 1993 1993 1996 1999 2002 Export duties in force in January December May September October 2002 Live cattle: weight up to 350 kg 30 0 75%, but not less than 75%, but not less than 75%, but not less than 1500 ECU/ton 1500 ECU/ton 1500 6/ton Live cattle: weight over 350 kg 30 0 55%, but not less than 55%, but not less than 55%, but not less than 540 ECU/ton 540 ECU/ton 540 6/ton Live sheep 30 0 50%, but not less than 50%, but not less than 50%, but not less than 390 ECU/ton 390 ECU/ton 390 6/ton Frozen beef 30 0 0 0 0 Pork fresh, chilled, or frozen 30 0 0 0 0 Non-fat powdered milk 30 0 0 0 0 Powdered whole milk 30 0 0 0 0 Butter 30 0 0 0 0 Wheat 30 0 0 0 0 Barley 30 0 0 0 0 Wheat flour 30 0 0 0 0 Cereals, grist, and pearls 30 0 0 0 0 Sunflower seeds 30 0 0 23 17 Flax and false flax seeds 30 0 0 23 17 Sunflower oil 30 0 0 0 0 Sugar 30 0 0 0 0 Molasses 10 0 0 0 0 Ethyl alcohol 30 0 0 0 0 Cattle hides 30 0 30%, but not less than 30%, but not less than 30%, but not less than 400 ECU/ton 400 ECU/ton 400 6/ton Sheep hides 30 0 30%, but not less than 30%, but not less than 30%, but not less than 1 ECU/piece 1 ECU/piece 1 6/piece Pig hides 30 0 27%, but not less than 27%, but not less than 27%, but not less than 170 ECU/ton 170 ECU/ton 170 6/ton Source: Ukrainian Customs Committee, 2002. sheep, as well as of cattle, sheep and pig hides and in 1999 on sunflower seeds, flax seed and false flax seeds. In line with the Presidential Decree of June 1995, confirmed by the Law of Ukraine of December 1995, exporters and importers of liquors, ethyl alcohol and tobacco have to be certified by the state, i.e. only state-owned enterprises certified by the Cabinet of Ministers can deal in exports and imports of ethyl alcohol. Ukraine still applies the system of "indicative prices," first introduced by the Pres- idential Decree of November 1994 and later modified by the Presidential Decree of 64 Achieving Ukraine's Agricultural Potential February 1996. These are minimum prices below which products cannot be exported. Prices of the corresponding goods on export or import markets are used as a reference. The system of "indicative prices" is applied, for example, when Ukraine faces antidumping measures or investigations. They are also applied to avoid price under- reporting by exporters trying to show lower revenues for tax reasons or to reduce the amount of foreign currency to be transferred to the National Bank of Ukraine (NBU) (Ukrainian exporters are obliged to sell 50% of their export proceeds in hard currency to the NBU). Indicative prices were also used as a reference under barter agreements be- tween the CIS countries. In 1994, the list of products covered by indicative prices was extensive and included almost all major agro-food products exported by Ukraine. In 1996, the list was reduced to hides, live cattle, mutton and sheep. As of end-2002, the list also included sunflower, flax and false flax seeds. In effect, indicative prices and export duties are currently applied to the same group of products. Trade Relations Agreements with Ukraine belongs to several multilateral agreements with neighboring countries such as the NIS the CIS, the CIS Economic Union and Free Trade Agreement, and the CIS Common Agricultural Market (CAM). However, as these agreements lack implementation mech- anisms, Ukraine's trade relations with these countries are based on bilateral agreements. The CIS was formally established in December 1991 as a loose coordinating body of former Soviet Republics and served as an institutional framework for several other multi- lateral agreements among CIS members. One of them is the CIS Agreement on the Cre- ation of Free Trade Area (FTA), signed by CIS members, including Ukraine, in 1994. The signatories agreed not to impose import or export duties or quantitative restrictions on goods originating in signatory countries. A list of exemptions was to be prepared. The FTA was intended to be a transitional stage for the formation of customs union. How- ever, in the absence of implementation mechanisms, the FTA has not been created. In 1996, Georgia, Ukraine, Azerbaijan and Moldova established "a mutual support group" called GUAM, partly as a reaction to the CIS failure to establish a FTA. After Uzbekistan joined in 1999, the group became GUUAM. One of the objectives of this group was to establish a free-trade zone, but so far no real progress has been made. Creation of the Common Agricultural Market (CAM) of the CIS was proclaimed in 1993 as a means to liberalize intra-CIS agro-food trade by allowing free movement of agricultural produce, foodstuffs, scientific and technological goods, technologies, means of production, and services for the agrarian sector on the grounds of mutually agreed rules and principles. The 1998 "Agreement on the Common Agricultural Market of the States--Mem- bers of the CIS" foresees a two-stage transition to the CAM. The first stage envisages the creation of a free trade zone. The second stage aims at the formation of a common customs territory by the states that are ready for further integration. During the second stage, all tariffs, licenses, and other barriers to the movement of goods would be re- Trade Policy and WTO Accession 65 moved, while member-states would implement a coordinated system of price regula- tion on market principles. The framework foresaw a price support mechanism, based on minimum guaranteed prices and on intervention purchases and sales of agricultural produce. The free movement of goods and services would be secured by a system of con- tracts and measures to reduce and finally eliminate customs restrictions, and by the gradual withdrawal of licenses, quotas and other administrative restrictions on mutual trade in agro-food products. The Agreement entered into force in July 2000 (for Ukraine--on 29 January 2001). However, it appears unlikely that the CAM will succeed due to political and eco- nomic difficulties in the co-ordination of trade policies among the signatories. The cre- ation of the CAM implies common external tariff. However, as discussed above, the CIS countries have not even been able to create a multilateral free trade zone. More- over, there is a large diversity of agriculture-related commitments undertaken or being negotiated by CIS members under their WTO accession process. For example, while Russia is negotiating a high level of agricultural support, Ukraine's position is more moderate and the Kyrgyz Republic (WTO member) has already bound most import tariffs between 5­20%. It is difficult to expect that CIS countries would be able to agree on a common external tariff which would comply with the WTO commitments of each individual country. For example, if tariff and non-tariff import regulations were higher or more restrictive after the Kyrgyz Republic's membership of CAM, other WTO con- tracting parties could dispute the formation of such a regional trade agreement. In ad- dition, for each tariff line on which the Kyrgyz Republic proposed to increase its bound rate of tariff, other WTO parties would have the right to claim compensation for the reduced access to the Kyrgyz Republic's market (TACIS 2000). Bilateral Agreements Ukraine has concluded bilateral free trade agreements with all CIS states except Tajikistan. Similar agreements have been signed with a number of other countries, such as Estonia, Latvia, Lithuania, and the Republic of Macedonia. According to these agreements, trade between the two parties should be free from duties, taxes, fees, and quantitative restric- tions. However, protocols attached to the agreements define extensive lists of products excluded from this general rule. In most cases, these lists include a large number of agro- food products. Moreover, the agreements provide for the possibility of introducing quantitative restrictions or equivalent measures pertaining to export and/or import of goods without preliminary notification or consultation with the other party. In addi- tion, these agreements do not contain an obligation to agree on the terms of termina- tion of such restrictions. The party that has introduced such limitations decides on their cancellation. Agreements with the Baltic countries will be rescinded in May 2004 upon the accession of these countries into the European Union. Agro-food products excluded from the bilateral free trade agreements are often im- portant Ukrainian exports. For example, in the mid-1990s Russia excluded ethyl alco- hol and white sugar from the free trade agreement between Ukraine and Russia enacted 24 June 1993. In mid-1990, these two products accounted for about 40% of Ukraine's total agro-food exports and the most important market was Russia. While ethyl alco- hol was completely exempted from the free trade agreement, white sugar imports from Ukraine were first subjected to a 25% duty and then to an annual quota for tariff-free 66 Achieving Ukraine's Agricultural Potential import of 0.6 million tons above which the 25% duty would be imposed. While there were other factors which undermined Ukraine's competitiveness on the Russian mar- ket, these measures contributed to the collapse of Ukraine's exports of ethyl alcohol and white sugar to Russia. Ukraine, along with other countries, was affected by Russia's decision to change the implementation of the VAT on exported and imported goods. Before July 2001, Russ- ian exporters had to pay 20% VAT on all exported goods, including to the CIS coun- tries. As of July 1, 2001, Russia applies zero rate VAT on all exports, which stimulates Russia's exports, including to Ukraine. Moreover, also as of July 1, 2001, Russia started to collect VAT for imported goods, including from Ukraine, directly on the border. Be- fore, Russian importers could pay VAT at the end of the accounting period, after the sale of imported goods. In addition to the inadequacies of the various existing agreements, there is a wide variety of formal and informal non-tariff barriers which impede trade between Ukraine and other CIS countries. These barriers include the non-recognition of standards and certification, transit tariffs, problems with the determination of origin, a lack of co- ordination between customs authorities over documentary requirements for exports and the periodic application of trade bans. Moreover, illegal "duties" and border payments are levied on legal trade, thus further undermining trade between Ukraine and the CIS countries (TACIS 2000). This is partly due to the overall weakness of institutions re- sponsible for the preparation and enforcement of the proper legal framework for trade transactions both in Ukraine and in other partner countries. Ukraine and the In June 1994, the European Union and Ukraine signed the Partnership and Co-oper- European Union ation Agreement (PCA), which came into effect in March 1998. The trade component of the PCA placed bilateral trade relations in a GATT/WTO-type environment. In fact, many WTO disciplines are already binding on Ukraine in relation to the EU and its Member States. These disciplines include the principles of most favored nation treat- ment (Article 10 of the PCA), freedom of transit of goods (Article 11), prohibition of quantitative import restrictions (Article 14), national treatment of exports with respect to internal taxes and other charges (Article 15), and adequacy of testing, registration and certification charges of imports (Article 16). Despite the PCA, the EU has maintained the "non-market economy status" for Ukraine. This remains a contentious issue, and might in some cases be harmful to Ukrainian interests in trade disputes, for example, in antidumping investigations against Ukrainian producers. Ukrainian prices are considered to be non-market based, which means that another country's prices are considered to assess the dumping mar- gin (known as the "analogue country system"), without taking into account Ukraine's comparative advantage. Ukraine benefits from the General System of Preferences (GSP) granted by the EU in January 1993 and reformed by a Council Regulation No 2501/2001 of 10 Decem- ber 2001. The GSP represents a list of tariffs on industrial and agricultural goods that are lower than tariffs provided in accordance with the most favored nation (MFN) treat- ment. In line with the 2001 reform, applied between 2002 and 2004, tariff duties on Trade Policy and WTO Accession 67 non-sensitive products continue to be suspended, while duties on sensitive products enjoy a tariff reduction: ad valorem duties by a flat rate of 3.5 percentage points of the MFN duty rate and specific duties by 30%. In addition, Ukraine has demanded bene- fits provided within "special incentive arrangements for the protection of labor rights." If this demand is accepted, Ukraine's preferential margin would double. However, as most agro-food product fall into the category of sensitive products enjoying rather small margin of preference, procedures are complicated (in particular the rules of origin for GSP treatment), and information about GSP preferences is not sufficiently transmitted to the Ukrainian exporters, the rate of utilization of the GSP by the Ukrainian exporters remains relatively low. One of the contentious issues in the EU-Ukraine trade relationship was the Euro- pean Commission decision to introduce quotas for low- and medium-quality wheat from 1 January 2003. This quota system allowed 2.98 million tons a year of low and medium-quality wheat to be imported at a favorable tariff rate of 612/ton. Imports out- side the quota are charged with the 695 tariff. Within the quota the United States take an allocation of 0.57 million tons and Canada 0.04 million tons. The rest of the quota, 2.37 million tons, is opened to other importers, including Ukraine and Russia. This compares with 3 million tons exported to the EU by Ukraine alone in 2001/02 and about 5 million tons in 2002/03. Therefore, in years of abundant crop in Ukraine, these measures would weaken Ukraine's grain exports to the EU. Implications of WTO Membership Ukraine was not a member of the General Agreement on Tariffs and Trade (GATT) and did not participate in the Uruguay Round of negotiations. Ukraine applied for WTO membership in December 1993 and presented a memorandum on its exter- nal trade regime to the Working Party members in November 1994. Topics under discussion in the Working Party include: agriculture, the customs system, excise tax, value added tax, import licensing and other non-tariff measures, industrial sub- sidies, national treatment, services, state trading, transparency and legal reform and TRIPS. Since 1995, ten meetings of the Working Party have been held, the last one in February 2003. Work has begun on "Check-list Issues," i.e. specific concerns raised by the Working Party and Ukraine's replies to questions or requests for clar- ification (http://www.wto.org). Progress in negotiations on agriculture is summa- rized in Box 4.1. The harmonization of national legislation with WTO requirements has already started. In order to secure non-discriminative access to the Ukrainian market, 20 acts will need to be passed or amended. For example the "Law on State Regulation of Agri- culture Produce Imports" will have to be modified to cancel seasonal import duties on vegetables and to abolish quotas on cattle imports. The "Law on Stimulation of Agri- cultural development for the Period 2001­2004" will need to be revised to cancel the requirement imposed on manufacturing enterprises to use tobacco raised and fermented in Ukraine. There is a wide range of other acts which will need to be amended, such as the Tax Code and regulations on food quality and safety. 68 Achieving Ukraine's Agricultural Potential B O X 4 . 1 Ukraine's Progress in the Negotiation Process on Agriculture, November 2003 Tariff Bindings: About 95% of consolidated tariff lines have been accepted by the Working Party members. Bilateral negotiations have been completed with 15 partners, including the EU. The implementation period of tariff reductions would spread between 2001 and 2005 (for a few tariff lines until 2010). At the end of this period, the maximum bound rate for agro-food products (groups 1­24 of the CN) will be 20%, with the exception of sugar for which the rate will be 50% (a tariff rate quota for raw cane sugar is provided, see below), and 30% for sunflower-seed oil. Bound rates will also be above 20% for goods subject to excise taxes (wine, liqueur and vodka and tobacco products). Ukraine has agreed to cut the average tariff on agro-food products from 30% in the first year of the implementation period, to the final level of 12.53% in 2005. It should be noted that the initial average tariff (30%) has been calculated on the basis of tariffs as they were applied before the Law "On the state regulation of agricultural produce imports" was enacted in 1997. Therefore, all increases in tariffs as they were enacted in 1997 were not taken into account. For comparison, the maximum rate of import duty for industrial goods will be 10% and up to 15% for selected products that are particularly sensitive for Ukraine. Ukraine offered to switch completely to the use of ad valorem import duties after the accession to the WTO, with the exception of goods subject to excise tax, for which specific duty rates will be applied until 2005­2006. Tariff Rate Quota (TRQ): Ukraine is negotiating a TRQ for raw sugar at 260 000 tons to be imported at the 2% tariff as from the year of Ukraine's accession to the WTO. Over-quota tariff would be 50%. There is some disagreement as to how Ukraine would distribute this quota among current and potential new raw sugar suppliers. Special and Differential Treatment measures: Ukraine does not negotiate such measures. Export Subsidies: Ukraine has declared not to use export subsidies for farm products. Domestic support: Ukraine offered de minimis at 5%, both for product specific support and for non-product specific support. Ukraine is negotiating Aggregate Measure of Support (AMS) at US$1.38 billion on the assumption that the base period would be 1994­1996. However, as the base period is "normally . . . the average of the most recent three year period" (WT/ACC/4) for acceding countries some Working Party members insist that the AMS calculations should be based on a period of 1997­1999 or 2000­2002. In the case of 1997­1999, the AMS would be US$60.7 million. Ukraine claims that the 1997­1999 period is not indicative of the level of agricultural support that is required, as in these years funding for agriculture fell due to the state budget deficit, lack of transparency in some schemes foreseen for funding, and the suspension of the state procurement for grains. The base period and the resulting AMS level are still under negotiations. Sanitary and phytosanitary (SPS) barriers: SPS measures will have to be based on scientific evidence. Ukraine will need to reconsider its epizootic rules, which are stricter than those applied by other WTO members, or ground them on a scientific basis. Ukraine's WTO accession will have numerous implications for Ukraine's economy, including agriculture: WTO membership will support the overall reform process by providing an institutional foundation for the continuation and further consolidation of economy-wide reforms. Consistency, transparency and predictability of trade regulations and the adher- ence to multilateral rules and disciplines, as defined within binding WTO com- mitments and disciplines, would provide a more stable framework for domestic and foreign agents, thus reducing risk and encouraging investment. Transporta- tion costs would also decrease due to the guaranteed freedom of transit through the territory of WTO member states. Ukraine would gain from the possibility of influencing future trade negotiations under the auspices of WTO and from better access to information on interna- tional trade systems and from the experience of other countries in dealing with trade issues. Full-fledged membership of Ukraine in the WTO is also a pre- requisite for closer economic ties with other countries. Trade Policy and WTO Accession 69 Any trade measures applied by Ukraine's partners would need to comply with WTO rules, thus reducing discriminative actions. In particular, access to the WTO dispute resolution process would be useful in the case of dumping charges, which often result in import restrictions. As Ukraine's domestic market for agricultural products is too thin to absorb do- mestic production, it is essential for Ukraine to improve its access to foreign mar- kets. As a WTO member Ukraine would be able to support other exporters who cannot compete with the subsidies paid in larger and richer countries, but rather must compete on the basis of low-cost production. These countries are especially dependent on a level playing field. The stronger their position within the WTO, the greater the chance that future negotiations will lead to improved market access and to stricter disciplines on domestic support and export subsidies (OECD 2003). However, if WTO accession is instrumental in stimulating production of compet- itive products, Ukraine's level of producer subsidies should be low, in particular for those products for which Ukraine expects to be a net exporter. For example, tariff and/or non-tariff measures against agro-food imports combined with a domestic price setting and market intervention system would drive domestic prices above world prices, thus undermining Ukraine's competitiveness on foreign markets. Therefore, as Ukraine will not be allowed to apply export subsidies, market price support policies driving prices above world market levels are not a feasible policy option. Thus, the zero limit on the use of export subsidies will restrict the scope of policies Ukrainian policy makers can apply. As market price support policies are among those that are most inefficient and distortive, Ukraine would gain con- siderably in the long run if more targeted, more efficient and less distortive poli- cies are applied. Binding tariffs at 20% for almost all agro-food products will mean a substantial fall in border protection compared to currently applied MFN tariffs in Ukraine (Table 4.4 and Figure 4.7). For example, bound tariffs will be between 1.5 and 2-fold lower than 2001 MFN tariffs for wheat, maize and eggs, 13-fold for sunflower seeds, almost 3-fold for beef and pork, 7-fold for poultry meat, and 2-fold for white sugar (tariff bound at 50%). Potentially, it could mean strong downward pressure for domestic farmgate prices. However, as demonstrated by the price differential between external reference prices and domestic farmgate prices (Figure 4.7), high border protection is not transmitted to domestic farmgate prices which remain low, often even lower than external reference prices. This reflects the fact that Ukraine is a net exporter of most primary agro-food products. Moreover, with the excep- tion of poultry meat and pork, the price differential in percentage terms is signifi- cantly lower than 2005 binding tariffs. This means that the impact of lowered MFN tariffs on domestic prices will be negligible, with the exception of poultry meat and pork, for which the domestic price in 2001 was higher than the reference price plus 20% tariff. Therefore, it may be concluded that binding tariffs at low lev- els will not exert additional pressure on producers, but will further limit the scope of market price support policies and will, as explained earlier, diminish the risk of strong fluctuation in prices when Ukraine switches from an export to an import position for a given product. 70 Achieving Ukraine's Agricultural Potential F I G U R E 4 . 7 Ukraine: MFN Tariffs, Price Differentials and 2005 Binding Tariffs for Selected Agricultural Commodities, 1993­2001 A. W H E A T B. M A I Z E 80 60 60 50 40 40 30 20 20 0 10 -20 0 -40 -10 -60 -20 1993 1994 1995 1996 1997 1998 1999 2000 2001 1993 1994 1995 1996 1997 1998 1999 2000 2001 MFN tariff, % Price differential, % 2005 Binding tariff, % MFN tariff, % Price differential, % 2005 Binding tariff, % C. B A R L E Y D. S U N F L O W E R 60 320 280 40 240 200 160 20 120 80 0 40 0 -20 1993 1994 1995 1996 1997 1998 1999 2000 2001 -40 1993 1994 1995 1996 1997 1998 1999 2000 2001 MFN tariff, % Price differential, % 2005 Binding tariff, % MFN tariff, % Price differential, % 2005 Binding tariff, % E. S U G A R F. B E E F 170 100 150 80 130 110 60 90 40 70 50 20 30 10 0 -10 -20 -30 -50 -40 1993 1994 1995 1996 1997 1998 1999 2000 2001 1993 1994 1995 1996 1997 1998 1999 2000 2001 MFN tariff, % Price differential, % 2005 Binding tariff, % MFN tariff, % Price differential, % 2005 Binding tariff, % Trade Policy and WTO Accession 71 F I G U R E 4 . 7 Ukraine: MFN Tariffs, Price Differentials and 2005 Binding Tariffs for Selected Agricultural Commodities, 1993­2001 (Continued) G. P I G M E A T H. P O U L T R Y M E A T 100 180 160 80 140 60 120 100 40 80 20 60 0 40 20 -20 0 -40 -20 1993 1994 1995 1996 1997 1998 1999 2000 2001 1993 1994 1995 1996 1997 1998 1999 2000 2001 MFN tariff, % Effective tariff, % 2005 Binding tariff, % MFN tariff, % Price differential, % 2005 Binding tariff, % I. E G G S Note: MFN tariffs: the applied import duty rate 120 based on Ukraine's MFN tariff schedule; specific tariffs have been converted into their ad valorem 100 equivalents (Table 4.4) 80 Price differential: the ratio between the measured 60 price gap between border and farmgate prices for a 40 given product, derived from the PSE database, and the corresponding border price; 20 0 2005 binding tariff: the rate bound within Ukraine's WTO negotiation process for a given product in the -20 final year of the implementation period of tariff 1993 1994 1995 1996 1997 1998 1999 2000 2001 reductions ( Box 4.1). MFN tariff, % Price differential, % 2005 Binding tariff, % Source: OECD Secretariat's calculations based on the Ukrainian Custom Tariff Laws and Regulations and on OECD PSE/CSE database. Ukraine's adherence to the WTO will imply meeting requirements under the San- itary and Phytosanitary (SPS) and Technical Barriers to Trade (TBT) agreements. To benefit from more open international markets for its agro-food exports, Ukraine needs to further improve the quality of agricultural commodities. With lower tariff barriers, other trade obstacles under SPS and TBT regulations will become increasingly essential for importing countries, particularly for processed food. Of crucial importance for Ukraine is the establishment of a sound, scien- tific, consistent and transparent approach to determining pest and disease risks associated with the agro-food trade, both to be able to participate effectively in possible disputes over SPS measures applied by other countries, but also to apply the appropriate, least trade restrictive measures to manage that risk for animal and crop imports. In many cases, these measures should meet internationally agreed standards. The initial cost of adjusting domestic quality standards to those applied internationally can be quite high, but in the longer run the harmoniza- tion of food standards for domestic and export markets would reduce the costs of the double standards applied so far. C H A P T E R 5 Evaluation of Support to Ukrainian Agriculture T he evaluation of support to Ukrainian agriculture presented in this Review is based on the methodology developed by the OECD. The following indica- tors of support to Ukrainian agriculture are estimated: Producer Support Estimate (PSE), Consumer Support Estimate (CSE), Total Support Estimate (TSE) and General Services Support Estimate (GSSE) (see Annex 3 for definitions). The evaluation of support to agriculture (PSE/CSE analysis) is based on a compre- hensive inventory of agricultural policies. The approach has three major strengths. First, the identification and classification exercise is itself a valuable contribution to policy analysis. Second, the indicators of support provide a quantitative evaluation of policies based on a technique that is relatively simple and can be carried out on an annual basis. These estimates help provide an understanding of the scale of agricultural market dis- tortions and the cost of these distortions to food consumers and taxpayers. Third, %PSE and %CSE, representing aggregate tariff-equivalent measures of diverse policies, are well suited to cross-country comparisons. The evaluation of agricultural support is carried out annually for all OECD coun- tries as well as for a number of non-OECD transition economies (OECD 2002a, OECD 2002b). The estimates for transition economies, undertaken initially as part of one-off Agricultural Policy Reviews,1 have been updated each year. As with OECD member countries, this analysis has become an important feature of the annual moni- toring of agricultural policies in a number of non-OECD economies. This Chapter pre- sents the evaluation of support to agriculture in Ukraine, undertaken for the first time as part of the preparation of the present Review. 1The OECD started applying its PSE/CSE analysis to transition economies at the beginning of the 1990s. In 1994, a first comprehensive Agricultural Policy Review for Hungary was released. Similar studies followed on Poland (1995), the Czech Republic (1995), Estonia (1996), Latvia (1996), Lithuania (1996), the Slovak Republic (1997), Russia (1998), Romania (2000), Bulgaria (2000), and Slovenia (2001). 73 74 Achieving Ukraine's Agricultural Potential Aggregate Results Evaluation of support has been done for the period of 1986­2001 on the basis of 12 agricultural commodities, accounting for about 70% of the total value of agricul- tural output in Ukraine. Producer Support The aggregate %PSEs for Ukraine are presented in Table 5.1 and Figure 5.1. The follow- Estimate ing periods in the evolution of producer support (%PSE) in Ukraine can be distinguished: Between 1986 and 1991, a phase of very high support under the planned sys- tem. Average %PSE for this period reached 72%, meaning that policies increased producers' gross receipts by almost three quarters. In general, the estimates for this period reflect the significant isolation of Ukrainian producers from inter- national markets that existed under the Soviet economy. High administered pro- ducer prices, large budgetary transfers, state trade monopoly and exchange rate controls, all contributed to the high pre-transition PSE estimates. Between 1992 and 1996, the initial years of the transition, producer support be- came very volatile and stayed negative for the most part of this period. The neg- ative %PSEs meant that agricultural producers in Ukraine were taxed. This result largely reflects the strong macroeconomic adjustments of the early transition phase. Economic liberalization brought about significant falls in relative agricul- tural prices and a drastic reduction in budgetary support. This period was also marked by the substantial depreciation of the national currency. Altogether, these developments caused a sharp switch in the relative levels of domestic and world prices, with domestic prices falling far below world levels. The %PSEs dipped most strongly in 1992 following the initial liberalization shock with its enormous depreciation of the exchange rate.2 In 1993 and 1994, the level of support began to recover, as domestic prices inflated gradually responding to the overall price liberalization. Prices for some commodities (grains and oilseeds) were addition- ally stimulated by temporary tightening of local supply.3 Substantial export lib- eralization in 1994 was another factor contributing to a rise in producer prices during this period. Finally, agricultural enterprises accumulated considerable ar- rears to the government on taxes and state loans during this period, which were T A B L E 5 . 1 Aggregate %PSEs and %CSEs for Ukraine 1986­91 1992 1993 1994 1995 1996 1997 1998 1999 2000p 2001e Percentage PSE 72 -48 8 6 -37 -4 16 13 -3 0 5 Percentage CSE -59 115 11 11 49 11 -13 -12 12 4 -2 e: estimate; p: provisional. Source: OECD. 2Average annual official exchange rate was used in calculation of the PSE and other indicators of agricultural sup- port. All information on data used and detailed tables are contained in Part II of the Report (provided on compact disk). 3This situation is discussed in more detail in Annex 4. Evaluation of Support to Ukrainian Agriculture 75 eventually written off or rescheduled. This represented an implicit subsidy to pro- ducers, additionally increasing support estimates during this period. However, the %PSE dipped again in 1995. Dollar world prices for some principal com- modities rose in that year, and this was combined with a continued weakening of the local currency. Therefore, the level of producer support was measured against increased world price levels. In contrast, rises in domestic prices were restrained by the government's anti-inflation measures as part of its macroeconomic stabi- lization program launched in 1995, involving, in particular, a sharp cut in fund- ing for agro-food state purchases. The budget consolidation also necessitated a reduction in direct budgetary subsidies to the sector. Taken together, all these fac- tors determined a strong decline in measured producer support in 1995. In 1997 and 1998, producer support recovered to moderately positive levels. The following main factors determined this trend. First, the exchange deprecia- tion slowed down considerably during this period, particularly in 1997. As a re- sult, world prices denominated in Ukrainian currency were rising less rapidly. On the other hand, domestic prices strengthened in response to a substantial in- crease in import protection as well as the removal of remaining export restrictions in 1996­1997. Thus, the average level of domestic prices in 1997 and 1998 sur- passed the world price level. In 1999 and 2000, producer taxation recommenced. The exchange rate factor again played a major role in this development. The financial crisis led to a sharp depreciation of the hryvnia at the end of 1998. The effects of this depreciation be- came fully apparent in 1999. The hryvnia equivalents of world prices appreciated strongly against domestic prices, which needed time to adjust to such an abrupt variation in the exchange rate. In 1999, the negative gap between domestic and world prices re-emerged, resulting in the negative %PSE estimates. In 2000, do- mestic prices were still below the world levels, but the negative gap narrowed and was fully offset by the budgetary transfers, so that the %PSE reached a zero mark. In 2001, producer support became positive. This result reflected a recovery in relative domestic price levels. Previous depreciation of the hryvnia made Ukrain- ian exports more competitive, pushing up exports. Improved demand for ex- portables was combined with a new rise in border protection for some importable commodities, e.g. poultry meat, eggs, and sugar. The sugar sector received addi- tional support through a domestic quota regime. Altogether, these factors caused the domestic prices for the majority of products to come very close to world lev- els, and the previously observed negative Market Price Support (MPS) to dissi- pate. Also, budgetary transfers were higher in 2001. The result was that the aggregate %PSE rose to 5% in 2001. The described evolution of support in Ukraine is generally similar to the trends observed in other transition economies: a phase of high support under the planned system; a downward swing at the beginning of the transition period; and modest and moderately fluctuating support in most recent years (Figure 5.1). The producer support trends in Ukraine were particularly close to those in Russia, however, since 1994, the Ukrainian %PSE has remained at lower levels than in Russia. 76 Achieving Ukraine's Agricultural Potential F I G U R E 5 . 1 Evolution of Producer Support (%PSE) in Ukraine and Selected Countries in 1986­2001 Ukraine Bulgaria Poland Russia OECD 100 % 80 % 60 % 40 % 20 % 0 % -20 % -40 % -60 % -80 % -100 % 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: OECD. F I G U R E 5 . 2 Percentage PSE by Country, EU and OECD Averages in 2000­2001 2000 2001 45 % 40 % 35 % 30 % 25 % 20 % 15 % 10 % 5 % 0 % -5 % lgaria Russia ngary Latvia OECD EU Bu Ukraine Poland SlovakiaLithuania Hu Estonia Republic Romania Slovenia ech Cz Source: OECD. A comparison of the %PSE for Ukraine and other transition economies shows that Ukraine is a country with one of the lowest producer support levels in the group. The %PSE in Ukraine at 5% in 2001 is roughly comparable with that of Bulgaria (3%) and is far below the OECD average (31%) (Figure 5.2). Evaluation of Support to Ukrainian Agriculture 77 Consumer Support The CSE, a PSE-coupled indicator measuring the cost of producer support to consumers Estimate of agricultural products,4 generally mirrored the developments in the market price sup- port (Figure 5.3). This means that substantial producer price support during the period of the centrally planned economy translated into an implicit tax on consumers. How- ever, this implicit tax was to some extent mitigated by direct budgetary transfers to the food processors and the grain industry.5 The situation was radically reversed when the transition began. The %CSEs became positive between 1992 and 1996, indicating that Ukrainian consumers were implicitly subsidized. From 1997, the %CSEs were chang- ing from positive to negative, reflecting fluctuations of domestic agricultural prices around the world price levels. In 2001, Ukrainian %CSEs was at minus 2%, indicating a slight taxation of Ukrainian consumers. Composition of As is seen from Figure 5.4, MPS was generally a more important component than the the PSE budgetary support6 in determining the aggregate level of producer support in Ukraine. However, during the transition period the contributions of MPS to the ag- gregate PSE varied strongly from year to year, reflecting fluctuations in the levels of domestic prices relative to world ones. As noted before, these fluctuations were partly caused by inevitable lags in adjustment of domestic prices to the abrupt changes in Ukraine's macroeconomic conditions, notably to the variations in the exchange rates. F I G U R E 5 . 3 Evolution of Consumer Support (%CSE) in Ukraine and Selected Countries in 1986­2001 Ukraine Bulgaria Poland Russia OECD 180 % 160 % 140 % 120 % 100 % 80 % 60 % 40 % 20 % 0 % -20 % -40 % -60 % -80 % -100 % 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: OECD. 4In the OECD methodology the consumer is understood as the first stage buyer of agricultural products. 5See section on "Consumer Measures" in Chapter 3. 6It is important to note that the category "budgetary support" in the PSE/CSE includes not only the actual bud- getary payments to producers, but also such indirect subsidies as benefits from preferential taxes, interest-free credit, debt forgiveness, as well an implicit subsidy from preferential electricity prices. 78 Achieving Ukraine's Agricultural Potential F I G U R E 5 . 4 Composition of Producer Support Estimate, 1992­2001 Million US$ Market Price Support Budgetary Support Producer Support Estimate 3 000 3 000 2 000 2 000 1 000 1 000 $ US$ 0 0 US Mn -1 000 -1 000 Mn, Support, -2 000 -2 000 y Estimate -3 000 -3 000 Support Budgetar -4 000 -4 000 d an S -5 000 -5 000 oducer MP Pr -6 000 -6 000 -7 000 -7 000 -8 000 -8 000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: OECD. The price gaps were also affected by the changes in specific policies, such as, the in- troduction of new import tariffs, or new domestic price mechanisms. However, in ad- dition to these "policy" factors, high volatility in domestic-to-world price gaps in Ukraine was a sign of weak integration of Ukrainian domestic markets with the world market. Inadequately developed infrastructure and high transactions costs in Ukraine impede the transmission of world prices onto the domestic market. The result is that domestic prices are not reactive enough to the world market signals, which causes the wedge between external and domestic prices to fluctuate stronger. Therefore, the MPS element of producer support may reflect not only the impacts of policies in a strict sense, but also the infrastructural and institutional weaknesses of domestic mar- kets and the resulting imperfect price transmission. This has to be considered when interpreting the MPS, and therefore, the PSE estimates for a transition country such as Ukraine. Total Support The TSE is a broader indicator of support, representing the sum of transfers to agri- Estimate cultural producers (the PSE), expenditure for general services (the GSSE), and direct budgetary transfers to consumers. The TSE generally followed the PSE trends, as the latter constituted the dominant part of the TSE (Table 5.2). Expressed as a percentage of GDP, the TSE indicates the burden of support to the agricultural sector on the overall economy. During the period of Ukraine's indepen- dence this share varied from about minus 18% to 5%, indicating that the Ukrainian economy went through different stages from substantial transferring of resources from agriculture to a moderate subsidizing of the sector. In 1999­2001, the percentage TSE in Ukraine was at 0.5%, the lowest level among the monitored transition countries after Bulgaria (Figure 5.5). Evaluation of Support to Ukrainian Agriculture 79 T A B L E 5 . 2 Indicators and Composition of Total Support to Ukrainian Agriculture 1986­91 1992 1993 1994 1995 1996 1997 1998 1999 2000p 2001e Total Support Estimate (TSE), 55 088 -923 192 7 055 776 37 852 600 -669 484 305 -364 4 725 3 743 -577 297 3 791 million LC of which: Producer Support Estimate 43 323 -1 070 075 6 331 070 25 499 380 -713 087 725 -986 4 218 3 232 -1 172 -130 3 213 (PSE) General Services (GSSE) 1 812 72 736 660 780 12 353 220 43 603 420 622 507 511 595 428 578 Transfers to consumers 9 954 74 147 63 926 0 0 0 0 0 0 0 0 from taxpayers Total Support Estimate in: millon US$ 71 476 -4 438 1 554 1 194 -4 545 -199 2 539 1 528 -140 55 706 million 6 62 697 -5 756 1 326 1 005 -3 474 -252 2 239 1 364 -131 59 788 TSE as share of GDP, % n.c. -18.3 4.8 3.1 -12.3 -0.4 5.1 3.6 -0.4 0.2 1.9 e: estimate; p: provisional; LC: 1986­1991 : Rubles; 1992­1995 : Ukrainian Karbovanets; 1996­2001 : Ukrainian hryvnias. Source: OECD. F I G U R E 5 . 5 Total Support Estimate in Ukraine and Selected Countries, 1999­2001 Average In % of GDP Romania Hungary Slovenia Lithuania Latvia Slovakia EU Czech Republic OECD Poland Estonia Russia Ukraine Bulgaria 0 % 1 % 2 % 3 % 4 % 5 % 6 % Source: OECD. Commodity Profile of Producer Support7 Level of Producer With a low aggregate %PSE in Ukraine at 5%, the levels of producer support vary sig- Support by nificantly across individual commodities (Table 5.3 and Figure 5.6 ). In 2001, for exam- Commodities ple, the highest %PSEs were observed for poultry (35%), pigmeat (33%), sugar (30%), and eggs (21%). During the period of Ukraine's independence these commodities 7A detailed overview of agricultural measures and trends in support for individual commodities is contained in Annex 4. 80 Achieving Ukraine's Agricultural Potential T A B L E 5 . 3 Ukrainian %PSE by Commodity, 1986­2001 1986­91 1992 1993 1994 1995 1996 1997 1998 1999 2000p 2001e Wheat 69 -147 -29 49 -33 -61 53 19 -9 19 3 Maize 85 -8 49 39 -16 -1 -19 -10 15 -10 2 Other grains (rye, barley, oats) 79 -91 27 36 3 9 7 15 -5 5 -6 Oilseeds 81 -58 24 23 -22 -15 -17 -32 -33 -28 9 Sugar 80 26 23 24 -41 67 28 14 15 24 30 Milk 73 -40 18 -31 -57 -33 -1 4 -26 -33 -25 Beef and Veal 84 13 34 -10 -55 1 15 -8 -2 14 14 Pigmeat 52 -64 -49 -36 -61 18 -2 30 25 8 33 Poultry 58 -32 10 18 4 15 33 42 12 38 35 Eggs 41 15 -3 16 22 55 45 49 36 1 21 All commodities 72 ­48 8 6 ­37 ­4 16 13 ­3 0 5 e: estimate; p: provisional. Source: OECD. F I G U R E 5 . 6 Ukrainian %PSE by Commodity in 2001 Poultry Pigmeat Sugar Eggs Beef and Veal Oilseeds Livestock commodities Crop commodities Wheat Maize Total % PSE (5%) Other grains Milk -30 % -20 % -10 % 0 % 10 % 20 % 30 % 40 % Source: OECD. have traditionally enjoyed high support. In contrast, milk was the most taxed prod- uct with %PSE at minus 25% in 2001, and the estimates over the longer run show a considerable taxation of milk producers for the most part of the 1990s. Another commodity, for which a relatively persistent taxation had been observed since the beginning of the reform, is the oilseeds (sunflower). The level of support for grains was variable, changing from moderate taxation to moderate subsidization since the mid-1990s. Evaluation of Support to Ukrainian Agriculture 81 F I G U R E 5 . 7 Distribution of Total Producer Support by Commodity in 2001 (million US$) 400 300 200 100 0 US$ -100 Million -200 -300 -400 -500 s r heat ds ps gs Milk veal ultry ock W Maize grain lsee Eg Po Oi Other Refined suga All cro and Pigmeat livest Beef All Source: OECD. Distribution of Total The distribution of overall producer support across commodities reflects price trends Producer Support and the levels of budgetary assistance to specific commodities, as well as the relative im- Across Commodities portance of these commodities to the overall agricultural production. Aggregate pro- ducer support is distributed quite unevenly between various products in Ukraine (Figure 5.7). In 2001, the bulk of the overall positive transfers were concentrated in the sugar and livestock sectors. The single exception in the livestock sector was milk, for which a substantial aggregate taxation was measured. Apparently, large negative trans- fers for this one commodity had a significant impact on the overall level of producer support in 2001, strongly bringing down the aggregate %PSE for 2001. Conclusions The long-term evolution of producer support in Ukraine was consistent with the trends observed for other transition economies. From very high pre-transition levels it fell considerably with the beginning of market reforms, and recovered to some modest (negative and positive) levels towards the beginning of the 2000s. This implies that overall policy distortions in Ukrainian agriculture were sub- stantially reduced during the transition. The annual fluctuations in producer support were, nevertheless, quite significant, reflecting the strong macroeconomic shifts during the transition, changes in agro- food and trade measures, and also infrastructural and institutional impediments to the transmission of world prices to domestic markets in Ukraine. 82 Achieving Ukraine's Agricultural Potential The MPS has been generally the most important component of transfers to (or from) Ukrainian producers during the years of the transition, indicating among other things the persisting price distortions in Ukrainian agricultural markets. The aggregate levels of producer support and the total support to the agricultural sector in Ukraine are currently one of the lowest among the transition countries analyzed. The aggregate low level of producer support, however, disguises considerable variations across commodities, with relatively high support for poultry, pigmeat, eggs and sugar, and a strong taxation of milk and oilseed sectors. C H A P T E R 6 Land Reform and Farm Restructuring T he process of land reform and farm restructuring started slowly, but in recent years has moved rapidly towards full private ownership of agricultural land and control of agricultural enterprises. Land reform in Ukraine legally began in March 1991, six months before the declaration of independence from the Soviet Union. Between 1991 and the end of 1999, the only major accomplishments were the transfer of state land to collective ownership and the transfer of additional land to house- hold plots. There was a brief and successful government experiment with the establish- ment of small private farms in the early 1990s but this was abandoned by the mid-1990s. Prior to 1999, the restructuring of large agricultural enterprises,56 primar- ily collective farms, was "skin deep," merely changing the sign on the door, with mini- mal changes behind the formally new facades. Since the end of 1999, however, there has been greater progress, providing the basis for genuine restructuring of agricultural enterprises and the expansion of privately controlled farms. First Phase of Land Reform, Initial Farm Restructuring Efforts57 The main stated goal of the government's land reform and farm restructuring program was to establish the system of ownership rights based on private property. Such a system should provide sufficient motivation to agricultural producers to create an efficient, com- petitive, and sustainable agricultural sector in Ukraine. The pace of land reform and farm restructuring between 1990 and 1999 was slow, but during this period a solid legal and 56The terminology used to describe different categories of farms will follow the standard Ukrainian legal definition of farm categories. Household plots are parcels of land that are owned by private individuals and may not exceed 2 hectares. Independent private farms are owned by private individuals and are larger than 2 hectares. Agricultural enterprises are farming enterprises (generally large farms) that are owned by legal entities such as cooperatives, part- nerships, collective farms, joint stock companies or are owned by private individuals. Individual owners may elect to register their holdings as either agricultural enterprises or as independent private farms. 57For more information on the first phase (pre-1999) land reform see Z. Lerman et al (1994). Lerman and Csaki (1997), and Z. Lerman, C. Csaki (2000). 83 84 Achieving Ukraine's Agricultural Potential methodological basis for subsequent reforms was established. During 1990­1999, the following measures in land reform and farm restructuring were undertaken: Creation of private farms was allowed in 1990. Government initiated a program to establish private farms by granting land leases and credit for equipment in the early 1990s, forming the core of private indi- vidual farms in existence today. Private property on land was acknowledged in the 1992 Land Code. In the early 1990s, Government allocated additional land for household plots. In 1994, lands that were owned by state have been transferred into collective ownership. This process was largely completed by 1998. In 1995, it was decided to allow distribution of land in the form of "land share certificates" (i.e. not in physical form), which gave each member of a collective the right to an undemarcated parcel of land equal in value to the parcels received by all other members of the collective. This process was largely completed by 1999. In 1995, it was also decided to allow the distribution of non-land assets of col- lective farms to their members. While these steps were significant in the land privatization and farm restructuring process they did not change the management control structure of agricultural enter- prises and led to minimal internal restructuring of these enterprises. The sector was still dominated by collective farm structures. Land share certificates could not be traded and the conversion of land share certificates to physically demarcated parcels of land was difficult. Although the accomplishments of land reform in Ukraine were modest up to the end of 1999, there were pockets of change-oriented activity across the country: some of these pockets were the farm restructuring programs financed and managed by inter- national donors (up to the end of 1999, 620 agricultural enterprises participated in these projects) and some were grassroots efforts--spontaneous local initiatives in which farm managers and regional authorities joined forces to accomplish deeper and more authentic restructuring with the objective of saving the local rural community from eco- nomic and social deterioration. The number of spontaneously restructured farms was estimated to be around 500. To put these impressive numbers in perspective, however, it must be noted that at that time there were 16,000 agricultural enterprises in Ukraine. Thus, the international donor projects and the spontaneously restructured agricultural enterprises represented only 7% of the Ukrainian total. Within the framework of these initial farm restructuring experiments, farm enter- prises changed their registered legal form and took over the ownership of their land from the state. Moreover, these privatized farm enterprises distributed land and asset shares to their individual members. Yet the internal structure largely remained that of the former collective, with very few instances of imaginative and creative efforts to re- organize the former collective into smaller, functionally independent, units. Even in international donor projects, the predominant mode in farm restructuring was to re- structure a collective farm into a different legal entity, but the farm size and farm man- Land Reform and Farm Restructuring 85 agement remained the same. Among the 300 farm enterprises participating in the USAID funded Ronco project, 90% were reorganized into a single legal entity, an- other 8% have divided into two legal entities, and only 2% split into more than two legal entities. The much smaller IFC project managed to produce a somewhat higher frequency of agricultural enterprise break-ups, where 40 parent agricultural enterprises split on average into two successor enterprises each. The initial restructuring efforts resulted in only modest yield increases and barely measurable impacts on production efficiency, though they produced a favorable impact on labor relations and worker behavior on the reorganized farms, as measured by mon- itoring and evaluation surveys. On the whole, however, these efforts resulted in very valuable experiences which helped to accelerate land privatization and agricultural en- terprise restructuring, beginning at the end of 1999. Second Phase of Land Reform--Developments After 1999 The Government finally recognized that the ownership and management incentive structure of former collective farms needed to change if overall agricultural productiv- ity and profitability in Ukraine was to improve. Since December 1999, the Government of Ukraine has implemented some measures aimed at alleviating existing constraints to genuine land reform and agricultural enterprise restructuring. The December 3, 1999 Decree58 of the President formally dismantled the collective farm system by requiring that all collectively owned agricultural enterprises be dismantled and that the property of agricultural enterprises be leased to private legal entities or individuals. The govern- ment wrote off the debts of agricultural enterprises that completed this transformation. The right to exit from the collective farm with land and property share was guaranteed by that decree. The right to exit was declared unconditional, i.e. no permission of any authority or approval of the collective was needed to do so. The Presidential Decree also gave impetus to the process of issuing state deeds for land for demarcated parcels of land, and to the process of restructuring collective farms. In parallel to this land allocation program, the Government also legalized and promoted the development of rental markets for agricultural land. The legalization and rapid emergence of a rental market for agricultural land has allowed entrepre- neurial individuals the opportunity to rent land and to farm on their own accounts, increasing their incentives to farm more efficiently and profitably. These changed in- centives explain some of the increase in agricultural output in the 2000/2001 and 2001/2002 seasons. The continued development of this land rental market is as im- portant to the land reform process as the distribution of land ownership. It increases the efficiency of agricultural production by providing liquidity to the land market in the short run, while providing entrepreneurial individuals with access to land with relatively low cash outlays and the ability to adjust the size of their operations. The rental market would also provide the large population of rural land owners, more than 58Decree No 1529/99. 86 Achieving Ukraine's Agricultural Potential 80% of whom are unable or unwilling to farm the land on their own, with a source of supplemental income. The major accomplishments of the land reform are as follows: The land ownership structure in Ukraine has changed in favor of private owners. As of January 2002, only 4% of the arable land is still owned by the state. About 30% of land is privately owned and used by rural residents for subsistence farm- ing. More than 65 % of arable land is owned by the former members of collec- tive farm enterprises. The land reform made almost 7 million rural residents in Ukraine private own- ers of land. The land was distributed among current and former workers of the collective farms. The average size of land share is 4.2 hectares. Land itself was allocated free of charge, apart from the cost of a state deed for land, which is only 60­80 hryvnia. Land was also allocated to other rural residents who were not members of a collective farm, such as social workers, doctors or school teach- ers. A land reserve of a 3.0 million hectare was established and managed by local governments (APHD 2001). The land from the land reserve can be rented out by local governments to finance their social spending. Land reform provided a new source of income for rural residents. The new land owners were allowed to rent out their land. According to current law the value of annual rent should not be less than 1% of land value. The average hectare of land in Ukraine is valued at 9,205 hryvnia (about US$2,000/hectare) as of January 1, 2002, hence land rent can not be less than 92 hryvnia per hectare of arable land. On average, a land owner can get more than 400 hryvnia per year for renting out 4.2 hectares of land. That amount is equivalent to two and a half months of wages for average agricultural worker. The issuing of land titles to each eligible rural resident is currently under way. According to the official statistics of the State Committee of Ukraine for Land Resources, as of January 1, 2004, 3.32 million or more than 58% of eligible rural residents had received their land titles. The system of registration of land titles is to be created. The issuance of land titles, and particularly the demarcation of parcels is constrained by the lack of funding and specialized land surveying equip- ment. The State Committee for Land Resources estimates that the amount of funds that are needed to finish land titling is about 800 million hryvnia. (APHD 2001) The government has initiated a program to systematically issue the re- maining state deeds for land free of charge to landowners. This process is to be financed by international financial institutions and bilateral donors, and is ex- pected to take at least five years to complete. The new version of Land Code of Ukraine59 was passed by the Verkhovna Rada on October 25 of 2001. The current code is progressive by the standards of 59Law No. 2768-III as of 25.10.2001. Land Reform and Farm Restructuring 87 the region. It permits private ownership and transfer of agricultural land, and has most of the key requirements of a modern market oriented land code. (APHD 2001) Some concerns have been raised in international circles about two aspects of the Land Code: The first concern is that under the Land Code, agricultural land cannot be sold, used as collateral or contributed to the equity of newly created business before January 1, 2005 and that this would be a serious constraint to development of land and mortgage markets and creation of new private businesses in rural Ukraine. However, given the nature of the land allocation process and the enor- mous change that this implies for rural residents, this was a prudent measure on the part of the Parliament. It mitigates some of the power distortions that exist at the farm level between farm managers and the broader rural population until the land allocation process is complete. The second concern is that the Land Code allows long-term leases of land share certificates, which are an intermediate form of property right. Former collective farm managers still have considerable political and financial power in villages, and they often still control the non-land assets of the former collective farm. The concern is that they may use this power to force small land owners into unfavorable long term leases, effectively alienating these individuals from their land. However, official data show that land owners are not willing to lease land for long periods of time. Most of the renting arrangements have been short-term, i.e. 89% were for less than 5 years (Figure 6.1). F I G U R E 6 . 1 Length of Land Rental Agreements (years) in 2000 more than 10 1% 6 - 10 years 11% 1 - 3 years 47% 4 - 5 years 41% Source: State Committee of Ukraine for Land Resources. 88 Achieving Ukraine's Agricultural Potential The Transformation of the Large-Scale Farming Sector Transforming According to a December 3, 1999 Decree60 all collective farm enterprises must change the Former their legal status. Collective ownership should be abolished, and land and assets trans- Collective Farms ferred to private owners. These assets may only be leased by privately owned entities and not by a collective entity. In 1999, 64% of farm enterprises in Ukraine were col- lective farms, 14%--partnerships, 2% cooperatives and 4%--private farming enter- prises. According to data of the State Committee for Land Resources, as of January 1, 2003 non-state-owned agricultural enterprises had at their disposal 22.5 million hectares of agricultural land, which constituted 53.8% of all agricultural land in the country. Collective agricultural enterprises, which terminated their activities, but were still registered, had 267,000 hectares (Table 6.1). Most of the collective farms that re- main registered are "shell entities" that no longer control assets, many still hold the debt of the former collective farm. Partnerships farmed about 13.3 million ha, while agri- cultural cooperatives controlled 3.4 million ha. Legally registered private farms culti- vated 5.4 million ha. Subsidiary farms of non-state-owned enterprises, institutions, and organizations had under their control 102,000 ha. New farm enterprises generally do not own the land that they farm. They rent almost all land under their control. More than 5.6 million rental agreements have been concluded. Additionally, about 43,000 independent private farms operate without registration as enterprises. Despite the initial success in reregistering of former collective agricultural enter- prises, the following observations show that the process of farm restructuring has not yet been completed. T A B L E 6 . 1 Structure of Agricultural Lands Used by Non-state-owned Agricultural Enterprises as of January 1, 2003 Agricultural land area Incl. arable land Organizational and legal Number of Total, ths. Land area per Total, ths. Land area per forms of enterprises enterprises, pcs*. hectares enterprise, hectares hectares enterprise, hectares Collective farms 1158 266.9 230 177.3 153 Partnerships 9006 13275.1 1474 11560.8 1284 Cooperatives 2449 3433.0 1402 2899.4 1184 Other private agricultural enterprises** 5602 5413.7 966 4743.2 847 Subsidiary farms of non-state-owned enterprises, institutions and organizations 626 102.1 163 88.7 142 Total 18841 22490.8 1194 19469.4 1033 *The Table contains data on all the enterprises which are in the state register of enterprises and organizations, including. the ones which have terminated their activities. **The group includes more than 3.6 thousand enterprises founded by one natural person (excluding individual farms), agri-companies and other enterprises that manufacture and process agricultural products. Source: Data of State Committee for Land Resources (2003). 60Decree No. 1529/99. Land Reform and Farm Restructuring 89 The total number of enterprises after the transformation of collective farms re- mained almost the same (Table 6.1). That means that there were very few cases when a collective farm has been divided into several farm enterprises. There was very little change in land use patterns. More than 50% of former col- lective farms that had been transformed into another type of farm enterprise did not change land use patterns, i.e. successor farms are farming exactly the same land that the predecessor farm had. Farm managers from former collective farms have managed to capture manage- ment control or most former collective farm assets as a result of farm restructur- ing. This is supported by anecdotal evidence and by the fact that new farms are usually organized and owned by very few shareholders. More than 73 % of new agricultural enterprises have less than 10 shareholders. While this would be ex- pected, since there are a limited number of qualified farm managers in rural areas, the Government should be concerned about an over concentration of assets in the hands of a small number of individuals as this could result in large wealth dis- parities and social problems in the future. Both employment and land ownership patterns of new agricultural enterprises are comparable to former collectives. The average number employed in new farm enterprises was about 160. On average, new farm enterprises farmed about 1,300 hectares of land. Progress in distribution of property shares More than two thirds of newly created agricultural enterprises are using the property of a former collective farm (Pugachov 2002). The issue of distribution of property shares to former collective agricultural enterprises was not satisfactorily resolved until 2001. The Decree No. 62 of the President of Ukraine61 provided the opportunity for each former F I G U R E 6 . 2 Distribution of Newly Created Agricultural Enterprises by Number of Shareholders 10% 0% 26% 16% 48% 1 2 - 10 11 - 100 101 - 1000 more than 1000 Source: State Committee of Ukraine for Land Resources. 61As of January 29, 2001 "On Efforts to Secure Protection of the Peasants' Property Rights while Reforming the Agrarian Sector of Economy." 90 Achieving Ukraine's Agricultural Potential member of the reformed collective agricultural enterprises to obtain a share of non-land assets of the reorganized collective agricultural enterprise. These are known as "prop- erty shares." More than 6 million rural residents are entitled to property shares. Ac- cording to the Ministry of Agrarian Policy, 4 million people (69% of the eligible) had obtained certificates of property share ownership by December 1, 2001. According to the decree, the newly-established agricultural enterprises should pay rent for using as- sets that cannot be lower than 1% of the assets' value. However, many new agricultural enterprises are failing to do so. The Ministry of Agrarian Policy estimates that newly created agricultural enterprises paid rent for only 30% of assets they used in 2001. Asset capture, even if it is a temporary "loan" of assets, by small groups of individuals at the farm level could have a long term detrimental effect on the wealth distribution in rural areas, and is something that the Government should be concerned about for the long term social stability of rural areas. Status of the Large-The issue of farm debt Scale Farming Sector About 62% of new agricultural enterprises accepted all liabilities of the former collec- tive agricultural enterprises that they were created from, and more than 80% of new agricultural enterprises obligated themselves to pay the wage arrears of former collective farms (Pugachov 2002). The Parliament of Ukraine decided to write-off all the gov- ernment debt of those collective agricultural enterprises which completed a change in their legal status. Unfortunately, the write-off is not taking place as a part of a compre- hensive settlement, and is not predicated on a substantial restructuring of the agricul- tural enterprises. The large outstanding debt to the private sector (about US$1.7 billion) has remained out of the settlement, and there is no clear policy as to how this should be resolved. The Borrowing Liabilities Agency created in 2001 has failed to find a nation- wide solution to the problem. The government is making important steps to strengthen creditors rights and insure that debts will not be accumulated in the future. The "Law On Stimulation of Agricultural Development for the period 2001­2004" that was adopted in January 2001 abolished the moratorium on the bankruptcy of agricultural enterprises. That measure introduces a mechanism that will discipline new owners and make them liable for their debts. Partially, as a result of land reform and farm restructuring efforts, many farm enter- prises became profitable by 2000­2001, after years of incurring losses. An average level of profitability for all agricultural enterprises in 2000 was 9%. More than two thirds of agri- cultural enterprises were profitable in 2000. The level of profits in 2001 was lower than in 2000 due to the depressing effect of bumper harvest of 2001 on crop prices. Nearly 43% of agricultural enterprises in Ukraine were profitable in 2001, and the average level of profitability of profit-making enterprises was about 6%. (Table 6.2 and Figure 6.3) Development of Independent Private Farms and Household Plots Independent private farming has grown steadily both in terms of the number of farms and the area that they cover, but this segment of the primary agriculture sector is still small relative to household plots and agricultural enterprises. The number of indepen- Land Reform and Farm Restructuring 91 dent private farms grew from 82 to 4,3042 between 1991 and 2003. The average farm size increased from 24.3 to 66 hectares (Table 6.3). According to the law on individual farms, those that utilize 2 hectares or more are considered to be independent private farms and must register as such. Beginning in 1999 the number of independent private farms created each year increased substantially. In 2002 alone, almost 1,500 new farms were created. But, private independent farms occupied only 2.8 million hectares or 4.6 % of Ukraine's 60.4 million hectares of agricultural land in 2003. T A B L E 6 . 2 Profitability of Agricultural Enterprises (million. hryvnia) 1995 1996 1997 1998 1999 2000 2001 Aggregate profits of agricultural enterprises 748 -1396 -3407 -4061 -3399 1400 930 %of profitable agricultural enterprises 69.8 31.5 12.8 8.1 15.8 65.5 56.9 Profitability rate of agricultural enterprises 10.6 -11.2 -23.9 -28.3 -22.1 9 6.1 Source: State Committee of Ukraine for Statistics. F I G U R E 6 . 3 Profitability Indicators for Farm Enterprises 2000 80 1000 70 60 0 1995 1996 1997 1998 1999 2000 2001 50 -1000 40 -2000 30 -3000 20 -4000 10 -5000 0 Aggregate profits of agricultural enterprises Percent of profitable agricultural enterprises Source: State Committee of Ukraine for Statistics%. T A B L E 6 . 3 Size and Number of Independent Private Farms in Ukraine 1990 1991 1995 1996 1997 1998 1999 2000 2001 2002 Number of farms 82 2098 34778 35353 35927 35485 35884 38428 41599 43042 Number of new farms 2016 32680 575 574 -442 399 2544 3171 1443 Land in farms, 1000 hectares 2 40 786 835 932 1029 1162 2158 2586 2822 Average farm size, hectares 24 19 23 24 26 29 32 56 62 66 Source: Yearbook of the State Committee of Ukraine for Statistics, 2001­2003. 92 Achieving Ukraine's Agricultural Potential There are several impediments for development of independent private farms in Ukraine: Credit systems that could support independent private farms, such as credit unions, are still in the early stages of development. The commercial banking sys- tem is not well-developed enough to service smaller farms. Input supply and output marketing systems that deliver or supply in smaller quantities needed by independent private farmers are only beginning to develop. Input supply and marketing cooperatives which enable groups of small farmers to buy and sell in bulk, have not yet developed. Excessive administrative regulation by local authorities in the sale and movement of produce adds to the cost of marketing. Household plots, are widely spread throughout Ukraine. Their average size rarely ex- ceeds 0.5 hectares and almost all households have at least one such plot. The Law of Ukraine (No. 742 as of May 15, 2003) "On private household plots" states that the size of a private household plot should not exceed 2 hectares, otherwise it is no longer con- sidered as such. The activities of household plots are mainly non-commercial. Most of the produc- tion from household plots is intended for own household consumption, but surplus production is sold in local markets. Based on household survey information, 67% of production on household plots is exclusively for home consumption the balance, 33%, is grown for sale but sometimes retained by the household depending on conditions in a particular year. Household plots have been a critical social safety net for both rural and urban residents in Ukraine during the economic transition. Household plots produce more than half of the agricultural output in Ukraine. In 2000 they produced 62.0% of agricultural gross produce, that constituted 3.5 billion hryvnia (in 2000 prices). In 2001 the contribution of household plots to agricultural output decreased to 58.7%, and in 2002 it amounted to 59.9%. Though, the absolute value (in hryvnia million) of gross produce grew in 2001­2002 (Table 6.4). The relative importance of household production in agricultural output is the result of a number of factors. The first is the large labor surplus in rural areas which has forced most rural res- T A B L E 6 . 4 Agricultural Gross Production (in 2000 prices), hryvnia, billion All categories of farms Incl. household plots Total gross Incl.: Crop Animal Total gross Incl.: Crop Animal Years production production production production production production 1991 90.7 43.6 47.1 28.0 10.8 17.1 1995 67.8 38.4 29.4 30.5 15.3 15.1 2000 55.7 33.6 22.0 34.5 18.3 16.2 2001 61.4 37.8 23.6 36.0 18.9 17.1 2002 62.5 37.2 25.3 37.5 19.4 18.1 Source: State Committee of Ukraine for Statistics. Land Reform and Farm Restructuring 93 idents into subsistence farming as a means of survival. At current labor rates, household plots can produce labor intensive crops such as potatoes, vegetables and meat and dairy products at a lower cost than agricultural enterprises. The second is the low rates of pro- ductivity on agricultural enterprises caused by slow reform of the farms themselves, and continuing inefficiency of input supply and output marketing chains, and credit mar- kets on which they depend. Since the labor surplus in rural areas is expected to persist for at least a generation, and it would probably not be socially desirable to have a more rapid rural urban mi- gration, the government should take seriously the need to improve the public services that would enhance the productivity of household plot producers. Traditionally the government policies neglected the household plots, as they did the independent private farms. The support services and input supplies remain tied to local agricultural enter- prises, to which household plot users are associated. In recent years the government has begun to develop policies to support household farming and to create a legal basis for their operation. Unfortunately these policies, such as improved access to markets, improved varieties from small-holder producers, agri- cultural extension and training services, and an institutional and legal framework for lending to small producers, have yet to been implemented. According to the State Committee for Land Resources of Ukraine, as of January 1, 2003 there were 6.2 million household plots, and they farmed 3.2 million hectares of agri- cultural lands. During the years of collective agricultural enterprise restructuring the number of private household plots and land areas they have been using have increased (Table 6.5). Independent private farms, together with household plots, cultivate 5.8 mil- lion hectares of arable land, which is roughly 20% of the country's total arable land. In summary, the independent private farm and household plot sector has developed slower over the last decade than many western observers and local experts had antici- pated. Despite serious difficulties, the independent private farming sector and house- hold plots have become a major component of Ukrainian agriculture. The role and future of independent private farming in Ukraine cannot be separated from the future evolution of the agricultural enterprise sector. The unavoidable further change in the agricultural enterprise sector and the pressure of farm debt will most probably lead to a new configuration in the relative roles of small-, medium- and large-scale farms. While it is not probable that independent private farming will attain a role like that in West- T A B L E 6 . 5 Major Indicators of Private Household Plots As of As of As of As of Indicators January 1, 2000 January 1, 2001 January 1, 2002 January 1, 2003 Number of household plots, ths. 5723.7 5973.2 6156.9 6214.8 Number of new household plots, ths. 249.5 183.7 57.9 Land in household plots, ths. hectares 2679.3 2967.1 3160.5 3227.1 Land in new household plots, ths. hectares 287.8 193.4 66.6 Source: data of State Committee for Land Resources of Ukraine. 94 Achieving Ukraine's Agricultural Potential ern Europe and North America, their role will undoubtedly be further enlarged, if hard budget constraints and transparent financial policies are imposed upon the sector (es- pecially on the agricultural enterprise sector). All the components of the farming sec- tor: agricultural enterprises, household plots, and individual private farms, have major efficiency problems and are constrained by the lack of appropriate policies and inade- quate markets. The Government will need to focus its efforts on creating a business en- vironment for agriculture that allows the most efficient producers to thrive, adjust their patterns of production, and adopt new technologies to increase their productivity. Im- proving market access, encouraging the development of marketing and input supply co- operatives, providing extension services and developing plant and animal breeding programs that meet the needs of small producers, are all important ways in which the Government could assist. Future Directions for Land Reform and Farm Restructuring Land reform and farm restructuring has made significant progress in recent years, but there is still a large agenda to be completed. The following actions will be required for land reform to be complete and farms to restructure into more efficient units: Complete the land privatization process and issue state deeds for land to all landowners, through a Government supported program. Complete the allocation of (non-land) property shares through a Government supported program. Establish an efficient and transparent land titling and conveyance system in order to reduce the cost of protecting and transferring property rights. Improve the legal framework for mortgages and other secured transactions that allow mortgages on agricultural land, and other long-term rural credit arrangements. Establish a working bankruptcy system that will temporarily protect farms that are restructuring from creditors, but will quickly liquidate agricultural enterprises if bankruptcy in unavoidable. This will allow other more efficient farms to ac- quire and use the assets of bankrupt farms. Continue to implement the current Government policy framework that encour- ages efficient production by enforcing hard budget constraints at the farm level. This includes a continuation of the current Government policy of not providing subsidies in the form of inputs directly to farms or through Government managed credit programs, which have in the past resulted in the accumulation of debt. Recognize the significant role of household plots and individual private farms in the Ukrainian agricultural sector, particularly in rural employment, and institute policies that meet the needs of this segment of the sector. Improving market ac- cess, encouraging the development of marketing and input supply cooperatives, providing extension services and developing plant and animal breeding programs that meet the needs of small producers, are all important ways in which the Land Reform and Farm Restructuring 95 Government could assist. This should be a priority for the Government because household plots and individual private farms are the most viable option for ab- sorbing surplus labor that will result from agricultural enterprises reducing labor requirements as they become more efficient. Encouraging small-holder farming could be a solution to a growing unemployment problem. Improve the business environment in which farms have to operate. After many of the necessary conditions for farm restructuring mentioned above have been met, the key constraint to farm restructuring will be the business and policy en- vironment in which farms operate. It is very difficult for farms to restructure in an environment where marketing chains are inefficient, resulting in low farmgate prices for output and high farmgate prices for inputs, where contracts are diffi- cult to enforce, and where local governments continue to force farm managers to make decisions that are not optimal. The Government will need to continue to improve the business environment in which farms operate (as is discussed in other chapters of this report). Reduce the costs of various mandatory business registrations for establishing and operating farms. C H A P T E R 7 Competitiveness and Structural Change in the Agroprocessing Sector A n agroprocessing industry which is capable of producing internationally com- petitive food products is an essential pre-condition for utilizing Ukraine's sig- nificant agricultural potential. The privatization of Ukraine's agroprocessing sector is already quite advanced. Unfortunately, many of the new owners do not have the financial resources for technological improvements and have made less investment and improvement in efficiency than expected. The agroprocessing industry is still not able to be an engine of agricultural growth and produce the quality processed products required by the international marketplace. There is a need for significant post-privatization re- structuring and the promotion of further FDI should remain a high priority. Overview of the Food Industry The food industry is important to the Ukrainian economy, and its share of gross value added, total output and total employment has even grown slightly over the last five years (Table 7.1). In 2001 it comprised nearly 20% of gross value added (GVA) and output value and about 13% of total employment. Though the profitability of the food industry has declined in this period, it is still greater than for the manufacturing sector as a whole. With real output and real GVA in the food industry growing between 1996 to 2001 by 25% and 40% (4.4% to 7.0% per annum), respectively, and employment in the sec- tor declining by 10% (2.3% per annum), the output and GVA per worker increased by 40% and 57%, respectively (Table 7.2). While the increase in output per worker was similar to the manufacturing sector as a whole, the increase in GVA per worker in food and agriculture was significantly larger than for the economy as a whole, or for the man- ufacturing sector as a whole. These figures indicate that the food industry has been one of the most vibrant sectors in the economy. Comparison of the relative size of the food industry of Ukraine in 2001 with several Central and Eastern European Economies (CEECs) in 2000 indicates that the orders of magnitude are very similar; that is, about 3­6% of the output and employment of the whole economy and 15% to 30% of the output and employment in the manufacturing sector as a whole (Table 7.3). Ukraine is neither the highest nor the lowest in any of these 97 98 Achieving Ukraine's Agricultural Potential T A B L E 7 . 1 Food Industry in the National Economy 1996­2001 Annual rate 1996 2001 Growth of change Gross Value Added, billion 1996 hryvnia Total economy 72.1 84.8 17.6% 3.3% Total manufacturing 22.4 23.8 6.2% 1.2% Food industry 3.1 4.3 40.1% 7.0% as % of manufacturing 13.9% 18.3% as % of total 4.3% 5.1% Output value, billion 1996 hryvnia Total economy 185.43 22.6 21.9% 4.0% Total manufacturing 77.8 92.10 18.3% 3.4% Food industry 11.9 14.8 24.1% 4.4% as % of manufacturing 15.3% 16.1% as % of total 6.4% 6.6% Employment, thousand Total economy 23232 20942 -9.9% -2.1% Total manufacturing 5300 4484 -15.4% -3.3% Food industry 645 576 -10.8% -2.3% as % of manufacturing 12.2% 12.8% As % of total 2.8% 2.7% Profitability, % Total manufacturing 8.9 3.7 Food industry 12.2 4.0 Source: State Committee of Ukraine for Statistics. T A B L E 7 . 2 Growth in Output and Gross Value Added per worker, 1996 hryvnia 1996­2001 Annual rate Output per worker, thousand hryvnia 1996 2001 Growth of change Total economy 8.0 10.8 35.2% 6.2% Total manufacturing 14.7 20.5 39.8% 6.9% Food industry 18.5 25.7 39.1% 6.8% GVA per worker, thousand hryvnia Total economy 3.1 4.0 30.5% 5.5% Total manufacturing 4.2 5.3 25.5% 4.6% Food industry 4.8 7.5 57.1% 9.5% Source: Calculated from Table 6.1. indicators, but given its resource endowments and later turnaround in terms of food and agricultural production, it should have more potential for expansion of these shares in the future. Of course, this depends as well on whether or not other sectors of the econ- omy expand more or less rapidly than the food industry. With regard to changes in food industry output and employment, Ukraine is in the middle range of performance when compared to eight CEECs over similar, though not the same, time periods. The annual rate of growth in food industry output (measured in Euros) is exceeded by Hungary, Poland, Lithuania, and Bulgaria, while others are lower, and two countries in the region had negative growth rates. All of the countries Competitiveness and Structural Change in the Agroprocessing Sector 99 T A B L E 7 . 3 Comparison of Food Industry Shares in CEECs, 2000, % Food industry Food industry share Food industry share in total Food industry share in manufacturing share in GDP employment in manufacturing GVA employment Ukraine (2001) 5.1* 2.7 18.3 12.8 Estonia 2.8 3.5 17.4 17.3 Latvia 4.1 2.6 31.6 16.3 Lithuania 5.61 4.1 26.9 23.3 Poland 3.9 5.0 18.7 18.9 Czech Rep 3.6 2.6 13.0 11.3 Slovak Rep 2.9 2.2 11.4 9.7 Hungary 6.5 3.2 13.8 13.2 Romania 6.6 2.3 30.4 11.5 Bulgaria 3.6 3.7 25.0 17.0 *Calculated as GVA in the food industry divided by GVA in the total economy. Source: European Commission 2003, Page 8, Table 1. T A B L E 7 . 4 Description of Food Subsectors in Ukraine, 2001 Output Basic assets in Share of per worker food industry total food %of total per year, at the end of Number of industry food industry thousand 2001, million Subsectors enterprises output, % employment, % hryvnia hryvnia Meat and meat products 1225 10.4 10.1 55.5 1534 Milk and milk products 854 16.6 15.0 60.1 2577 Fish and fish products 273 0.8 1.3 31.0 169 Vegetable and animal 592 5.6 3.2 94.7 998 oils and fats Processing of vegetables 499 2.9 4.8 33.2 1097 and fruits Grain mill products, starches 1316 5.4 8.2 35.8 2248 and starch products Other food products, including 2912 29.8 41.2 39.1 6981 bread and bakery products, pasta, sugar, cocoa, confectionery, chocolate, tea, coffee, spices etc.) Prepared animal feeds 350 1.1 2.0 28.8 935 Beverages 1026 19.1 13.1 78.9 4133 Tobacco products 32 8.4 1.2 391.9 781 Total food industry 9079 100.0 100.0 54.1 21454 Source: State Committee of Ukraine for Statistics. in the comparison experienced employment declines in the last few years of the 1990s. Among these countries, Ukraine is in the middle of the range with regard to the rate of employment decline in the food industry. Ukraine has over 9,000 enterprises in the food industry, about 25% of which are large and medium-sized, which means more than 50 employees and more than 60.5 mil- lion in annual gross revenue (Table 7.4). It should be anticipated that the number of 100 Achieving Ukraine's Agricultural Potential firms, especially of the smaller ones, will decline as natural consolidation of the food industry progresses in the future. Nearly 90% of the food output comes from these 9,000 enterprises, the remaining being produced in agricultural enterprises. Only in the case of feedstuffs does a major- ity of output come from agricultural enterprises (Annex Table A5.1). The total value of output in 2001 was over 31 billion hryvnia, of which nearly 20% is beverages, about 17% milk products, and 10% meat products. Though not disaggregated here, sugar also accounts for about 10% of the total, or one third of the "other food" category. The total employment in the industry is close to 600,000 workers. Sub-sectors that are more capital intensive, such as beverages, tobacco, and fats and oils production, nat- urally have employment shares much smaller than the output shares. Those that are more labor intensive, such as fish, fruits and vegetables, animal feed, and "other products" have employment shares well above output shares. The remaining sub-sectors are near the in- dustry average and have similar shares of output and employment. This is, of course, re- flected in the annual output per worker, which ranges from 392,000 hryvnia per worker in the tobacco sub-sector to about 30,000 hryvnia for fish, fruits and vegetables, grain milling and fodder production. One may expect the latter two sub-sectors to be some- what more capital intensive, but this may well be the result of excess labor retention still existing in these sub-sectors. At this stage of the transition these comparative ratios are still likely to see significant future adjustment. As consolidation and productivity growth occurs in the food industry, the output per worker will naturally increase in the future. A comparison of Ukraine's 2001 output per worker (in Euros) with that in CEECs for 1999 and 2000 is a good indication of its current status and future potential (Table 7.5). Ranked from the highest to the lowest for the food industry as a whole, Poland, the T A B L E 7 . 5 Comparison of Output per Worker in Ukraine (2001) with CEECs (1999 and 2000), 000 6 per year Czech Slovak Poland Republic* Hungary Republic* Lithuania Estonia* Latvia* Romania* Ukraine 2001 $/6 = 0.8956 2000 1999 1999 2000 1999 1999 1999 1999 2001 Meat and meat products 45.3 47.7 36.7 41.0 27.1 33.6 27.3 11.9 11.5 Milk and milk products 54.3 69.7 59.3 68.2 32.6 38.3 25.4 8.2 12.5 Fish and fish products 34.3 88.9 ** 31.3 20.5 15.0 14.9 6.4 6.5 Vegetable and animal oils and fats 129.7 95.7 194.0 90.8 50.0 n.a. n.a. 35.7 19.7 Processing of vegetables and fruits 44.6 33.4 35.4 25.4 14.3 18.3 63.3 6.5 6.9 Grain mill products, starches and 80.1 104.2 44.2 51.7 29.1 16.7 38.0 12.2 7.5 starch products Other food products, including 35.6 24.8 29.0 27.2 19.1 17.5 18.2 8.1 6.0 bread and bakery products, pasta, sugar, cocoa, confectionery, chocolate, tea, coffee, spices etc.) Prepared animal feeds 163.7 63.8 66.0 60.1 51.8 21.3 n.a. 20.0 8.2 Beverages 69.7 58.4 46.1 45.9 37.8 55.9 n.a. 20.4 16.4 Tobacco products 99.0 n.a. 118.1 n.a. 212.5 n.a. n.a. n.a. 81.5 Total food industry 53.0 44.5 41.9 41.8 30.0 26.1 24.3 13.0 11.3 *total does not include tobacco **fish and meat products are combined Source: CEECs from European Commission, Annex Tables 23 and 24, February 2003, Network of Independent Agricultural Experts in the CEE Candidate Countries. Competitiveness and Structural Change in the Agroprocessing Sector 101 Czech Republic, Hungary, and the Slovak Republic are in close proximity at the top, and Romania and Ukraine are close together at the lower end. The remaining countries for which comparable data was available form a fairly similar cluster in the middle. It is to be noted, that some of them do not include the tobacco industry, but that would only increase the differences between Ukraine and those countries and probably would not change the ranking much, if at all. Not all countries included animal fats with the oils processing sub-sector. The food industry rankings are not the same for all sub-sectors. Hungary is significantly higher than the others for the fats and oils sub-sector. The Czech Republic is the highest for meat, dairy, fish and grain mill products, and may well have the highest food industry average if tobacco products were included. Lithuania is high- est among those reporting the tobacco industry. At the lower end, Romania's output per worker is lower than Ukraine for milk products and practically the same for meat, fish and fruits and vegetables. Though these data are one or two years apart between Ukraine and the other coun- tries, most of them began their market reforms and privatization several years before Ukraine. Thus, the comparison can be seen as a sign of the potential for Ukraine (as also for Romania) if progress on privatization, restructuring, and reform continues. The dynamics of output growth for some specific products in the Ukraine food in- dustry gives a more complete picture of the differences in performance among the dif- ferent sub-sectors. Though nearly all of the products reported here (except cigarettes and mineral water) saw a decline in output during the transition period (since 1990), nearly all of them have also experienced a rebound within the last several years (Table 7.6 ). For most of these products, the lowest output was in 1996 or 1997; but in a few cases, T A B L E 7 . 6 Dynamics of Ukraine Food Industry Output, thousand tons Change Change Commodities 1990 2001 from 1990 from low Meat (including 1st grade meat offal) 2763 329* -88% 0 Sausages 900 167 -81% 8% Butter 444 156 -65% 43% Whole-milk products (in milk equivalent) 6432 1009 -84% 52% Fatty cheeses 184 105 -43% 127% Vegetable Oil 1070 936 -13% 84% Margarine products 289 198 -31% 134% Granulated sugar 6791 1947 -71% 9% Flour 7671 2981 -61% 0% Bread and bakery products 6701 2449 -63% 0% Cereals 962 301 -69% 2% Pasta 360 111 -69% 0% Preserves, millions of cans 4836 1549 -68% 39% Confectionery** 1111 731 -34% 158% Soft drinks, million deciliters 151 85 -44% 138% Mineral waters, million deciliters 55 65 19% 334% Alcoholic drinks, million deciliters 31 17 -46% 0% Cigarettes, billions 69 70 0% 55% *Including hog heads. **Not including public catering output. Source: Statistical Yearbook of Ukraine, 2001. 102 Achieving Ukraine's Agricultural Potential output was lowest in 2001 (Annex 5 Table A5.2). In the case of mineral water, output in 2001 even exceeded that in 1990. For other products, the output in 2001 ranges all the way from 13% below (vegetable oil) to 88% below (meat) the levels in 1990. Meat and sausages are especially notable in this data, because it reflects not only the decline in consumption but also the even more severe decline in meat processing by the tradi- tional meat processing plants, which now process less than one third of the domestically produced meat consumed in Ukraine. The rebound in output began in 1997 with the higher value products, such as con- fectionery, preserves, mineral water, soft drinks, and cigarettes. Output in these have in- creased by 30% to over 300% since the lows of 1996. Milk and milk products, except butter, and vegetable oil products turned around one year later. By 2001, output of these products, including butter, increased from 40% to over 130% from their lows. However, processing of meat, sausages, sugar, cereals and cereal products were at their lows in 2000 or 2001, and have not yet seen a significant rebound, except perhaps in 2002. Alcoholic drinks are in a similar situation, though this may be more a reflection of failures of the tax collection system than an actual decline in alcohol production, since alcoholic drinks pro- duction that avoids taxation is also not counted in production statistics. In economic terms, the changes in output value are more important than the quan- tities, since they can indicate if higher value products are increasing as a share in total output (Annex 5 Table A5.3). This set of data have a little more detail on other food products, so that sugar and bakery products can be separated. Also, this data includes all food output, including that from agricultural enterprises, which account for about 12% of the total in 2001. Those sub-sectors which declined continuously as a share of total food industry output from 1996 to 2001 were meat and meat products, fish and fish products, grain mill products, bread and bakery products, and prepared animal feeds. These are also the only sub-sectors which had a lower real output at the end of the period in 2001 than they had in 1996. The remaining sub-sectors increased their shares of food industry output over this period, though with differing timing and speeds. The most significant increases in shares were for beverages, "other foods," fruits and vegetables, and tobacco, though the latter two still represent relatively small shares of total output. These four sectors are also the ones that did not experience negative growth rates in the 1996­1999 period. The fact that all sub-sectors and the food industry as a whole had robust real growth rates in the 1999 to 2001 period reflects, for the most part, improved general economic conditions in Ukraine. A structural change in the food industry can be seen not only in the changing relative shares of different sub-sectors but also in the declining importance of food production by agricultural enterprises. Food output value, including these en- terprises, grew at 3.2% per annum compared to 4.4% per annum when their output is excluded. In fact, during this period, the share of agricultural enterprises in food pro- cessing declined from 16% to 12%. The large variation among sub-sectors in relative changes over time in both quantity and value of food output indicates that the food industry is finding a new product mix that is more consistent with the market demand for products. It is also far less constrained by non-market factors than it was during the pre-reform period. Since the output mix in Competitiveness and Structural Change in the Agroprocessing Sector 103 the pre-reform period had very little relationship to what market forces would bring about, it should not be anticipated that a food industry driven primarily by market factors would ever return to what existed then. Rather, it is now and will continue to be driven primar- ily by consumer demand in the domestic and world markets and the relative ability of the Ukrainian agriculture and food industries to be competitive in these markets. Privatization of the Food Industry Progress and Privatization has proven to be an essential ingredient in the restructuring of agriculture Concerns and food industries in transition economies of Europe that have been most successful in building a competitive food industry. In general, the earlier and the quicker it occurred in the transition process, the more successful has been the sector in attracting investment (including FDI) and in achieving greater competitiveness in the domestic and interna- tional markets. Ukraine was relatively slow in getting this privatization process initiated and implemented, but in the last few years progress has been relatively faster. Though the mechanisms of privatization did not change since the last World Bank report on the subject four years ago, (Meyers and Helmstadter 1999) the process has generally accel- erated and was aided by a more favorable policy environment, including, importantly, the lifting in October 1997 of the ban on privatization of grain processing enterprises. In the past few years, virtually all of the remaining state enterprises in the upstream and downstream sub-sectors of the agro-food industry have been offered for privatiza- tion and most of these have been at least partially privatized. Of the over 4,000 enter- prises subject to privatization, more than 83% have had all their shares sold, nearly 12% sold between 70 and 90% of shares, and only 2.3% had less than 50% of shares sold as of January 1, 2002. A similar pattern, with some variation, applies to each of the sub- sectors (Annex 5 Table A5.4). In order to take account of the sizes of firms, it is better to look at the value of pri- vatized shares in these enterprises. Without exception, the share value data for every sub- sector indicate that the larger enterprises are less likely to be 100% privatized. Based on share value, 58% of food industry shares are in enterprises that are completely priva- tized and nearly 90% of shares are in enterprises that are at least 70% privatized At the other end of the spectrum, nearly 6% of shares are in enterprises that are less than 50% privatized. One fact that becomes clear with this data is the predominance of grain, sugar, and agri-service in terms of the share value. Agri-service62 shares alone account for nearly 30% of total food industry shares (for this purpose including agri-service enter- prises), while these three sub-sectors together account for 75% of the total (Figure 7.1). There is some difference, however, in the pattern of privatization across sub-sectors. For meat, fruit and vegetables, milk, and agri-service more than 70% of shares are in en- terprises that are 100% privatized. This figure drops to about 60% of shares for grains and bakery enterprises, but is only 33% and 22% for sugar and vegetable oil enterprises, respectively (Figure 7.2). For the latter two sub-sectors, the predominant portion of 62Agri-service in this case means agribusiness activities that provide services to the farm but are not considered to be processing, such as fertilizer or agricultural chemical supply, grain marketing or machinery leasing or sales. 104 Achieving Ukraine's Agricultural Potential F I G U R E 7 . 1 Share Value by Degree of Privatization, 1 January 2002 900 800 700 H Below 50% A 600 U 500 50% to 69% 400 70% to 99% illion 300 m 100% 200 100 0 Oils milling industry industry bakeries industry Agri-service Meat Milk vegetablesand Grain Vegetable and Sugar Bread Fruits Source: State Property Fund of Ukraine. F I G U R E 7 . 2 Percent of Share Value by Degree of Privatization, 1 January 2002 100% 80% Below 50% 60% 50% to 69% 70% to 99% 40% 100% 20% 0% Oils milling industry industry bakeries industry Groups vegetables of Agri-service Meat Milk Grain and and Sugar VegetableTotal Bread Fruits Source: State Property Fund of Ukraine. shares, (about 56%) were in enterprises that were 70% to 99% privatized. Vegetable oil enterprises also had the highest portion of shares (22%) in enterprises that were less than 50% privatized. Bread and bakery enterprises were the only other sub-sector where the less than 50% category accounted for more than 10% of shares. This indicates that veg- etable oil enterprises in particular, and sugar and bakery enterprises to some extent, were lagging behind other sub-sectors in terms of reaching a more complete state of privati- zation. In quantitative terms, less than 50% of shares are privatized at 2 out of 43 enter- prises producing vegetable oil, and at 6 out of 439 bread-making enterprises (Annex 5, Competitiveness and Structural Change in the Agroprocessing Sector 105 Table A5.4). However, privatization of 51% of shares allows influencing the adoption of decisions at those enterprises. The privatization process for these agribusiness enterprises differs from that for non- agro-industrial enterprises in that most of the shares available for privatization could be distributed at advantageous terms or free of charge to the enterprise employees, managers, and the raw material suppliers (producers) (Meyers and Helmstadter 1999, p 11­13). However, the process of privatization for agribusiness enterprises changed over time. The ownership transfer to employees and management occurred mainly through a combina- tion of: a) privileged sale, which allowed sale at reduced prices; and b) lease buy-out agree- ments, which entitled management and employees to an amount of value in the enterprise equal to the increase in value which they had brought to the enterprise through equip- ment contribution and profit. For raw material suppliers, shares could be acquired free of charge. For others, shares could be purchased with compensation or privatization certifi- cates or with cash. There are no legal impediments to the sale of shares of any shareholder to other domestic or foreign investors, so the ownership structure can change through time as the initial shareholders sell shares to others. It is interesting to see how the predominant means of privatization changed over time. In the period actually before the first special privatization decree for the agro-industrial complex ("On Specifics of Privatization in Agro-Industrial Complex," CMU Decree number 51 dated May 15, 1993) most of the "privatization" was done under the 1992 Law on Leasing of State and Communal Property. The law allowed for the conversion of state enterprises into a type of private enterprise, whereby the assets belonged to the state but the lessee was responsible for running the enterprise and was entitled to the profits. Under the law, a legal entity (in most cases the workers collective) could conclude a lease agreement with the State Property Committee. The specific terms of the lease were de- scribed in the individual lease contracts. Lessees were allowed to introduce new capital, and were entitled to keep the profits. So in this period, nearly all the privatization (94%) was to employees and managers. After the 1993 law and up to September 1996, employees and managers still obtained nearly 40% of the shares, but nearly 20% went to raw material suppliers and another 40% was sold for compensation and privatization certificates and cash (Table 7.7 ). From September 1996, which was shortly after the second specialized law for agro-industrial enterprise privatization was issued (Law of Ukraine N. 290, July 10, 1996), until January 1, 2002, less than 25% of shares went to employees and managers, about 33% to raw ma- terial suppliers, 15% for certificates and 25% for cash. The aggregate result of these three stages or periods was that less than 50% shares were obtained by employees and managers, less than 25% by raw material suppliers, and about 35% with cash and certificates. These averages also imply that a large share of the privatization occurred after September 1996, since the final distribution is clearly closer to the pattern of the privatization that occurred after that date. It is also informative to compare the patterns of privatization prevalent in different sub-sectors (Table 7.7 ). The majority of enterprises in the oils and fats industry were leased out, in accordance with the legislation of the USSR, even before privatization started in Ukraine. The privatization plans for them were approved before the 1993 106 Achieving Ukraine's Agricultural Potential T A B L E 7 . 7 Dates and Methods of the Privatization of AIC Enterprises* by Share, % (initial floating of shares) Methods and types of owners Employees and Employees of managers of agricultural privatized enterprises enterprises (farmers) Outsiders Compensation Privileged Lease and privatization Period sale agreement Free transfer certificates Cash Total All AIC enterprises by June 1993 45.5 48.7 4.5 0.7 0.6 100 through June 1993­ September 1996 37.4 4.0 19.4 30.7 8.5 100 through September 1996­ January 1, 2002 23.3 1.7 34 15.5 25.5 100 The structure of share 33.3 9.6 22.6 20.8 13.7 100 placing for the whole period of privatization Sub-Sectors for whole period Meat industry 41.7 14.5 15.3 14.5 14.0 100 Milk industry 34.2 18.9 18.1 17.8 11.0 100 Vegetable oils and 21.4 36.4 11.8 18.3 12.1 100 fats products Fruit and vegetable processing 34.1 7.4 23.3 22.1 13.1 100 (including canned fruit and vegetable) Bakeries and grain processing 24.8 0.9 42.7 5.3 26.3 100 Sugar industry 38.9 10.6 23.3 19.4 7.8 100 Agri-service enterprises 35.3 4.4 22.7 28.9 8.7 100 *excluding agricultural enterprises Source: calculations based on data from the State Property Fund. Law came into effect, so this sub-sector has the largest portion (36.4%) of shares ac- quired through the lease-purchase arrangement (Table 7.7). Employees acquired more shares under the privileged sales provision of the 1993 Law. This law also provided for free transfer of shares to agricultural producers, who acquired a relatively small portion (11.8%) of shares. A similar minor portion of shares was acquired for cash in open sale (auctions, stock exchange, etc.). The privatization of enterprises in the meat and milk sectors followed a similar sce- nario and also resulted in more than 50% of shares being acquired by employees. Enter- prises in the meat sector were among the first to be privatized. So, in the meat industry the level of purchase of shares by the employees of enterprises (by means of privileged sale and lease) is nearly as high as for the fats and oils sub-sector. A slightly higher portion of shares was transferred free to the agricultural enterprises. The privatization of enterprises in the milk industry also started in 1992, when approximately 40% of the enterprises in the sector were leased. But the portion of shares offered for free to the agricultural enter- prises was higher than for meats and much higher than for fats and oils enterprises. Competitiveness and Structural Change in the Agroprocessing Sector 107 The sugar sector privatization began like the others just described, but employees and managers acquired slightly less than 50% of shares. Starting from the mid-1990s, fur- ther privatization of enterprises was carried out under the 1993 law, and raw material suppliers (employees of agricultural enterprises) acquired nearly 25% of the shares. The remaining sectors, having started the privatization process later, had even lower proportions of shares acquired by employees and managers (26 to 41%). Privatization of enterprises in the bakeries and grain processing sector started much later, which helps to explain a very different pattern of share distribution. The majority of these enter- prises started privatization in accordance with the 1993 Ukrainian legislation but only after October 1997, when the ban on their privatization was lifted. Though a number of enterprises in Vinnytsya, Zaporizhya, Kyiv and Odessa oblasts were leased out, most of the privatization in this sub-sector was via free transfer to farmers (42.7%), cash sales (26.3%), or privileged sale to employees and managers (26%). While progress in privatization has been significant during the last few years, it is also important to emphasize that the privatization process is far from completed. After looking at the progress made, it is now necessary to focus on what remains to be done. Based on value of shares, more than 40% of the food industry still operates with some level of government ownership. In some, these may be "nuisance" shares of 5% or less, but it could still be a constraint on management and operation of firms. More than 10% of food industry shares are in enterprises that still operate with more than 30% of gov- ernment ownership and nearly 6% are in enterprises with more than 50% government ownership. And in certain sub-sectors progress has been far slower than in others. With- out pushing ahead to rapidly complete this process, the full benefits of privatization can- not be realized. It has often been the case in other transition countries that the last 5 to 10% of shares in any enterprise are the hardest to privatize, so different measures may be needed in such cases. Privatization and One of the important reasons for privatization is to attract investment that is needed to Foreign Direct restructure and modernize the food industry. While domestic sources must always be the Investment major source of capital investment in the industry, foreign investment has a critical role to play in building a competitive food processing industry. Ukraine has a large popula- tion, whose incomes are only just beginning to recover from the deep and long economic downturn; but Ukraine also has significant long-term potential as a food exporter. Tak- ing advantage of such potential both in the domestic and foreign markets requires mod- ern processing technologies, competitive quality standards, excellent marketing skills, and a network of international clients. Foreign investment is often the quickest means to enhance capacity in these vital areas. Under Ukraine law, foreign citizens and juridical entities can purchase companies that are being privatized. No limitations exist for foreign investors regarding the percentage of their ownership in privatized objects, and foreign investment can be made in any objects which are not forbidden by the laws of Ukraine. To be considered as an enterprise with foreign investment, the percentage of foreign investment should be not less than 10%. The procedure of privatization in the agribusiness industry has the important re- striction that 51% of shares should be assigned to agricultural commodity producers 108 Achieving Ukraine's Agricultural Potential (non-government agricultural producers (farmers), primary product suppliers and workers of the privatized enterprise). This ratio could change over time, because there is no restriction on selling and buying of shares after completion of privatization. The rate of 51% was introduced by the Decree of Cabinet of Ministers of Ukraine No 51- 93 in 1993 and was confirmed also in a 1996 Law. At present, this provision is still in force and remains a disincentive for foreign investment in companies which still have shares that have not been privatized. For a few years, beginning in March 1992, there was a tax incentive for foreign in- vestors in Ukraine. If the percentage of foreign investment in enterprise statutory cap- ital (assessed contribution) was not less of 20%, then such enterprise should not pay income tax for the period of 5 years. However, this tax incentive was cancelled in 2000 by the Law About the Removal of Discrimination in Taxation of Subjects of Entrepre- neurial Activity, Created With the Use of Property and Facilities of Home Origin. Since 1996, foreign direct investment in the Ukraine manufacturing sector and in the food industry, in particular, has been rising at a robust pace. Though starting from a very low level compared with CEE countries, (Cramon-Taubadel et al., p 40) total FDI grew nearly 500% from 1995 to 2001 and food industry FDI grew 700%. Food industry FDI grew to 20% of total FDI by 1997 and has remained near that level (Fig- ure 7.3). It is not by sheer coincidence that foreign investment has experienced such strong growth during the period when privatization was progressing relatively rapidly. In fact, a concern based on experience of CEECs is that FDI growth may slow down when privatization is completed (European Commission, p 18). With the share of FDI in the food industry declining to 18% in 2001, this could be a concern, though it is too early to know if this change will persist or is only temporary. The share of FDI going to the food industry in Ukraine is higher than in many CEE countries, though that could just reflect the relative lack of good opportunities in other sectors of the economy. Comparing FDI relative to food industry output may be a bet- ter indicator. The level of FDI relative to food industry output reached 13.7% in 2001. F I G U R E 7 . 3 FDI in the Food Industry 1000 25.0% 800 20.0% FDI US$ 600 15.0% all of 400 10.0% million 200 5.0% percent 0 0.0% 1995 1996 1997 1998 1999 2000 2001 Food Industry Percent of total Source: State Committee of Ukraine for Statistics. Competitiveness and Structural Change in the Agroprocessing Sector 109 Though this is still well below levels achieved in Hungary and Lithuania, for example, it is a respectable achievement given the later start made by Ukraine in privatization and economic reforms. It is important to note, however, that more than half the food in- dustry FDI is in the beverage sub-sector and nearly another 13% is in tobacco process- ing (Annex 5 Table A5.6). Another 23% is accounted for by vegetable oils and the category of "other food products." This is typical of patterns of food industry FDI in CEE countries as well (European Commission, p 18). However, in many CEE coun- tries the role of FDI has been far greater. In Ukraine, FDI makes up about 20% of the assets in the food industry, with beverage and tobacco sub-sectors over 50% and fats and oils nearly 40%. However, in neighboring Hungary for example, foreign owner- ship is over 60% on average for the food industry and above 80% for tobacco and bev- erage sub-sectors (European Commission, p 30­31). It is important that the policy environment be conducive to the continued growth of this vital resource in building a more competitive food industry. The small growth in food industry FDI seen in 2001 is a concern and should be carefully monitored to determine if this is a harbinger of stagnation in this important indicator. Efficiency of the Marketing Chains Improving efficiency of the marketing chains is critical to improving the well-being of pro- ducers, consumers and other participants in the production and distribution process. It is also critical to improving competitiveness of Ukrainian goods in the international mar- ket. Such improvements in efficiency ultimately would enhance economic performance of the agri-food industry and benefit the economy as a whole. It is typical of countries in transition that after the removal of state pricing, state control of distribution and sub- stantial state subsidization of production and distribution costs, producers experience real price declines while consumers face real price increases. The comparison across several CEE countries of the initial terms of trade shock "associated with elimination of massive price distortions created under central planning," (Cramon-Taubadel et al., p 95), shows that Ukraine's experience relative to the decline in real farm prices is not unusual. The same can be shown for rising real food prices to consumers, which were heavily subsidized during central planning. This is a painful economic adjustment; but it is a necessary ad- justment to normalcy, where the actual costs incurred along the marketing chain between the farm and the consumer are reflected in the price margins that evolve at different points in the distribution system. These margins also reflect the relative efficiency of different agents in the marketing chain and how this is changing over time. An analysis of market margins for various agricultural products shows that margins for farm-to-export markets, for five of the top six export products, have declined over time (Figure 7.4 and Annex 5 Table A5.6). One of the factors that seems to have con- tributed to the improvement of efficiency in the farm to export marketing is the entry of private intermediaries who better manage and coordinate the flow of goods. A reason- able explanation for the observed improvements is that as more of the storage, handling and processing facilities for grains and oilseeds have been privatized, the new ownership, including foreign investors, have been able to improve the efficiency of these marketing channels. However, it is clear that there is substantial potential for further reduction of 110 Achieving Ukraine's Agricultural Potential F I G U R E 7 . 4 Farm to Export Margin 250% 225% 200% 175% farm 150% of 125% 100% 75% 50% percent 25% 0% -25% 1996 1997 1998 1999 2000 2001 Wheat Barley Sunflower Seed Sunflower Oil Beef Carcass Source: Author's calculations based on State Committee of Ukraine for Statistics data. transactions costs, especially with regard to numerous tariffs for transport, inspection, and certification that remain under Government control (USDA 2002). A recent study of the sunflower sector found that administrative charges and fees levied by the Govern- ment at various stages of rail transport are actually higher than the basic rail transport tariffs and clearly reduce competitiveness of Ukrainian products (FAO 2002). The volatility of these margins and the significant differences between such similar com- modities as wheat and barley characterize a marketing system that is still maturing and is still subject to policy instability and lack of stable marketing channels and institutions. A significant divergence of Ukraine export prices and world market price move- ments, especially in the last year for grains and the last two years for sunflower seed, in- dicates another problem. If it were a well functioning market with little or no policy intervention, Ukrainian export prices and farm prices, should more closely reflect world market price movements. Instead, Ukraine wheat export prices declined by 15% in 2001, while world market prices increased about 7% (Annex 5 Table A5.9). For barley, the divergence was not so great but the pattern was the same. In the case of sunflower seed, in both 2000 and 2001, Ukraine export prices hardly changed while world mar- ket price for sunflower seed increased more than 15%. Though certainly not the only explanation, the main cause of this price divergence is probably the introduction in late 1999 of a 23% export duty on sunflower seed. Though reduced to 17% in 2001, this intervention could explain a significant part of the increased wedge between Ukraine export and world market prices. Also, the fact that this wedge is larger in 2001 is con- sistent with policy changes. When the export tax was reduced in 2001, the Government also prohibited overseas tolling arrangements, which were extensively employed to avoid the export tax the previous year (FAO 2002). The intent of this export tax policy was to keep domestic sunflower prices lower and hopefully to increase processing and export of sunflower oil. However, combined ex- port revenues from sunflower oil and sunflower seeds have not increased since the tax was introduced. A similar policy was employed by Brazil in its soybean sector for many years and was abandoned in 1996. Extensive studies of this export tax showed that it Competitiveness and Structural Change in the Agroprocessing Sector 111 slowed the growth of oilseed production, so it is not surprising that soybean produc- tion nearly doubled since the tax was removed. Similarly, by reducing the domestic price of sunflower, the Ukraine export tax on sunflower seed makes this crop relatively less profitable and slows the growth of production. The only notable improvements in farm to retail margins were for wheat and wheat products (Figure 7.5 and Annex 5 Table A5.7). These reductions in margins were entirely in the wholesale to retail segment of the market, indicating possible improved efficiencies in the retail flour and bakery sectors. Such efficiency gains may be largely due to privati- zation and investment that has occurred relatively recently in that sub-sector. Perhaps one reason why little or no reduction in farm to retail marketing margins have been evident in other product markets examined is that relatively little investment and development has been seen up to now in the wholesale and retail marketing systems of Ukraine. Processed goods are still moved from processing to retail outlets by a large number of rel- atively small and poorly capitalized entrepreneurs, and the inventory management and in- formation systems that underpin modern food chain systems and link retail shelves to processing and trade activities are practically nonexistent. The experiences of several other CEE countries and also Latin American countries suggests that the transformation of the wholesale/retail marketing system can take place rather rapidly when it is driven by dy- namic supermarket chains. Often, but not always, this transformation is initiated by one or more of the large supermarket chains in Europe or North America. Given the size of the Ukrainian market and the high potential for developing the domestic food industry, it is only a matter of time before this process begins. The world's fifth largest retailer, Metro, which is already well established in many CEE countries, has announced plans to open it's first cash & carry in Kyiv this year.63 Other wholesalers and retailers are likely to follow, given that Ukraine has several large cities that are good potential markets. The French Group Auchan has recently entered F I G U R E 7 . 5 Farm to Retail Margins 250% 225% 200% 175% 150% wholesale 125% of 100% 75% 50% percent 25% 0% 1996 1997 1998 1999 2000 2001 Bread/wheat Flour/wheat Sunoil/Sunseed Sugar/SugarBeet Beef/carcass Milk/Milk Source: Author's calculations based on State Committee of Ukraine for Statistics data. 63On IGD Retail Analysis website http://www.igd.com/analysis/. 112 Achieving Ukraine's Agricultural Potential the Russian market, so it may be another likely candidate. Interestingly, the FOZZI Group of Ukraine is also planning to develop a network of food stores in Moscow, so domestic investors are not to be discounted in this process of development. The bene- fit of these large players in terms of the developing a more efficient marketing chain, is that they bring financial and human capital, technology, and established market net- works into play more quickly than would otherwise occur. They identify and build upon the best existing wholesale operations or establish new ones in order to ensure re- liable, high quality and timely supplies of domestic and foreign goods for their stores. By doing so, they contribute to a more rapid development of marketing infrastructure and institutions than would otherwise occur. They can also create competitive pressures on the sector that lead to more rapid improvements in competitiveness, as has been seen in Lithuania ( Jansik 2001). They also implement quality and safety standards that gen- erally exceed the national standards already in place and even foster changes in national standards (Reardon and Beredegue 2002). Such enhancement of standards and the in- creased ability of the domestic food industry to meet those standards also enhance the ability of the domestic food industry to compete in international markets. Actions to Improve Competitiveness in the Food Industry The competitiveness of agroprocessing in Ukraine, which is an essential condition for recovery in the primary agricultural sector could be enhanced by the following actions: Rapid Divestiture of Remaining Government Shares. Although privatization has progressed more rapidly in the last few years than it had earlier, this process is far from complete. As of January 1, 2002, nearly 5% of companies and 10% of the shares in the food industry were in enterprises where the government owned shares were still more than 30% of the total. Many more firms still have Gov- ernment ownership levels at 30% or less. It is important now to accelerate this process and make the privatization complete as quickly as possible. Even low lev- els of Government ownership can slow down the restructuring and moderniza- tion that is needed. The procedures established for the first stages of privatization may need to be implemented more aggressively or even be streamlined for this process to proceed more rapidly. If this is not done, the completion of privatiza- tion could drag on for years and thereby slow the drive toward competitiveness. For example, where the government owns less than some threshold % of shares, it may be most efficient to distribute these shares proportionately to current shareholders, cancel the shares, or sell shares on the stock exchange to quickly eliminate Government ownership. The appropriate threshold may be on the order of 10 to 20%, below which level it may become more difficult to dispose of remaining shares without these "fire sale" type mechanisms. Avoid Bailouts. There is sometimes a tendency during this stage of transition to slow or prevent inevitable failures or bankruptcies in privatized companies. In an industry with such a large surplus capacity, this is damaging to the stronger com- panies that have a chance to become more efficient and competitive. If the natural restructuring through liquidation and bankruptcy is allowed to occur, and to Competitiveness and Structural Change in the Agroprocessing Sector 113 occur in a timely fashion, it will speed up the development of a competitive in- dustry. Excess capacity in remaining firms will be reduced and scarce capital will not be squandered on a failing enterprise. The Government should also provide social safety nets and retraining programs for workers who are laid off. Attracting Foreign Investment. The measures already mentioned will also have the effect of making the industry more attractive to foreign investors. There are some agroprocessing companies in Ukraine that have attracted significant foreign in- vestment but many important sub-sectors have attracted very little. The Gov- ernment would only make the industry less attractive to foreign investors by excessive regulatory or market intervention or by prolonging the life of failing competitors in the industry. Institution Building. Ukraine has implemented some institutional reforms to cre- ate the environment required by a market-based food and agriculture sector. However, further efforts are needed in this area, and the strengthening of public institutions and the provision of public goods and services is one of the most im- portant tasks for the coming years. Wholesale markets, commodity exchanges, grades and standards systems, export promotion, domestic and international market information and the like, are still in their infancy in Ukraine, and there are important externalities in efficiently fostering their development. Timely and widely available information is lacking at all levels: farm, wholesale, retail, and ex- ternal trade. Occasional price information is published in newspapers and mag- azines; however, there is no system of regular market data collection, analysis and public dissemination for agricultural and food products. The current informa- tion needs of both private and public sectors cannot be adequately met without the rapid development of a modern agricultural statistical information system. Establishing an effective and transparent system of grades and standards is just as important, since a price is only meaningful if it can be associated with known characteristics of the goods being bought or sold. Deregulation of Markets. Significant progress has been made in market deregula- tion but much remains to be done. The lengthy struggle that has taken place be- tween the Government and exporting enterprises over VAT refunds is a prime example. What should be, and in most countries is, a simple financial transac- tion of claiming VAT refunds on goods that are exported has become a long and costly struggle between the private sector and the Government. The unnecessary transaction costs involved are essentially a tax on exports and surely diminish ex- port competitiveness. Similarly, whenever inspection, certification, testing, fu- migation, or other necessary monitoring and control procedures in the marketing chain become a source of revenue generation or rent-seeking rather than a trans- parent service activity, it raises transactions costs in the marketing chain and re- duces efficiency and competitiveness. An important example is the number of administrative charges and fees levied by the Government at various stages of rail transport, which even exceed the actual rail transport tariffs and clearly reduce competitiveness of Ukrainian products. The Government has an important role to establish rules and procedures for setting and implementing grades and stan- dards for quality and safety, certification, testing and the like and to harmonize 114 Achieving Ukraine's Agricultural Potential these with international standards but it also needs to ensure that these rules and regulations are carried out in a fair and transparent manner. Stable and Consistent Policies. Farmers and agribusiness enterprises have plenty of risk and uncertainty to deal with on a daily basis, and they do not need the Gov- ernment to introduce more uncertainty through ad hoc and unpredictable pol- icy changes. Investors and managers in the food industry need to make decisions in time horizons of several years at least. However, the absence of consensus on a long-run policy strategy leads to ad hoc measures like export taxes on one prod- uct and price intervention for another, which means policy instability and some- times policy contradictions. Thus, domestic market policies and trade measures should be developed in a consistent framework. These measures should reflect well-defined policy objectives, which need to place a high priority on building competitiveness in domestic and foreign markets. Policy formulations should be designed for a period of 4 to 5 years, so there is some measure of stability in the policy environment. Government and private decision makers alike would ben- efit from such stability. C H A P T E R 8 Rural Livelihoods and Rural Poverty-- Assessment and Solutions D uring more than ten years of transition, significant deterioration in social and economic well-being of rural residents in Ukraine has been observed. The causes of the decline in the level and the quality of rural life are the topics of on-going policy debate in Ukraine. Some insist that agrarian reforms failed to address social issues. Others suggest that that the social situation in rural areas is deteriorating because of the lack of reforms.64 But there is little disagreement that underemployment is a major problem and that the system of provision of social services in rural Ukraine is under severe strain and, thus, is in the need of a major overhaul. Formal employment in the agricultural sector has been declining as a result of downsizing in the agricultural sector and increased efficiency of labor use, forcing increasing numbers into subsistence agriculture. As a result, the livelihood of growing number of people in rural areas is based on a shrinking income base.65 At the same time, the demand for social support is increasing due to the need to deal with the social problems of transition, while the sup- ply of public funds that are available for social programs is shrinking. An aging rural population also places increasing pressure on these programs. A clear strategy for social development and increasing rural employment needs to be developed and implemented in order to address present and future social problems. The major purpose of the following chapter is to provide quantitative assessment of the changes in social and economic conditions in rural Ukraine. The focus of the chap- ter is on evaluation of the ability of rural residents to cope with social problems. Incomes in Rural Ukraine Changes in Rural During the 1990s, the level and structure of rural income changed considerably along Incomes in the 1990s with the decline of agricultural production.66 An over-supply of labor in rural areas, an 64Agrarian Reform In Ukraine: Achievements And Miscalculations (UCEPS Analytical Report), 2001., Pugachov (2002) Socio-economic status of rural areas in Ukraine. Seperovich (2002) Comparison of income and spending in urban and rural Ukraine. The World Bank. Ukraine--Poverty in Ukraine. Report No 15602 World Development Sources, WDS 1996. 65See Chapter 1 for the discussion of the employment issue in rural Ukraine. 66See Chapter 1 for data on magnitude and major reasons for decline in agricultural GDP. 115 116 Achieving Ukraine's Agricultural Potential T A B L E 8 . 1 Comparison of Household Monthly Incomes in Rural and Urban Areas Urban Rural 1999 2000 2001 1999 2000 2001 Total income, 1999 hryvnia including 308 303 348 355 346 364 In-kind income from subsidiary plots 38 26 25 161 127 103 Cash income 233 244 291 164 197 240 Other 36 33 31 30 23 21 Income as a % of total income Total income, % 100 100 100 100 100 100 In-kind income from subsidiary plots, % 12 9 7 45 37 28 Cash income, % 76 81 84 46 57 66 Other, % 12 11 9 8 7 6 Source: Income and Expenditures of Ukrainian Households in 2000: Based on Survey of Living Conditions of Ukrainian Households. Statistical Publication--State Committee of Ukraine for Statistics, Kyiv 2001, p. 192. increasing need for farms to become more efficient, and a decline in demand for agri- cultural products has led to a substantial decline in agricultural sector wages. The share of expenditures on labor remuneration in agricultural production costs declined from 33% in 1990 to only 13.5% in 2000.67 The gap between agricultural wages and aver- age wages for Ukraine also widened. By 2000, agricultural wages were half the level of wages in the rest of the economy. To make matters worse, most of the rural residents in the 1990s were paid only after substantial delays and mostly in-kind. Between 1994 and 1998, the number of days the agricultural wages were in arrears increased from 7 to 232 days, which is more than 7 months (Csaki et al., 2001). Fortunately, by the end of 2002 total wage arrears had been reduced to 340.2 million hryvnia, but was still equivalent to 21.7% of yearly wages (Ukraine 2003). By the mid-1990s, in-kind in- come accounted for more than half (56%) of the total (cash and in-kind) income of rural households, compared to 23% of the aggregate income of urban households (Clarke). Household plot production has become the main source of income (UCEPS 2001). The income generating opportunities in rural Ukraine shrank considerably due to downsizing of the agricultural sector. That left most of the rural population with much less per capita income than in the early 1990s. The 2000­2001 economic growth in Ukraine's economy and agriculture led to sub- stantial growth in current, real, and dollar denominated household monthly income (Table 8.1). Urban residents so far gained more from the recovery of the Ukrainian economy than rural residents. Total hryvnia denominated real monthly income of urban residents increased by 15% in 2000­2001, compared to a 5% increase for rural residents. Despite that, in 2001, rural households still had total monthly incomes that were comparable to urban households. In 1999­2001, the share of in-kind income from subsidiary plots declined from 45 to 28% of the aggregate nominal income of rural households Table 8.1 (Clarke). Most of the recorded decline in in-kind income from household plots occurred because the owners were able to convert more of the food pro- duced on the household plots into cash income than before. An analysis of regional dif- 67Data from the Ministry for Agrarian Policy of Ukraine for 2001. Rural Livelihoods and Rural Poverty--Assessment and Solutions 117 T A B L E 8 . 2 Structure of Cash Income of Rural and Urban Households in Ukraine (%) Urban households Rural households % change in % change in 1999 2000 2001 1999­2001 1999 2000 2001 1999­2001 Salaries (received from enterprises and organizations) 59 61.9 48.6 -18 36.2 34.5 27.4 -24 Salaries received from private sector, entrepreneurial income 4.6 3.9 3.3 -28 3 2.5 1.99 -34 Private subsidiary household plots 1.2 1.5 1.4 17 20.9 24.9 19.3 -8 Income from asset ownership (interests, dividends) 0.3 0.3 0.9 200 0.1 3.2 4 3900 Social transfers (pensions, allowances, benefits) 22.1 20.4 33 49 26.3 24.5 36.6 39 Other income 12.8 12 12.9 1 13.5 10.4 10.7 -21 Cash income--total 100 100 100 100 100 100 Source: Income and Expenditures of Ukrainian Households in 2000: Based on Survey of Living Conditions of Ukrainian Households. Statistical Publication-- State Committee of Ukraine for Statistics, Kyiv 2001, p. 193. ferences in cash income, using the household survey data, showed that the regional dif- ference in cash income was small, with Western Ukraine having slightly lower cash in- comes than the national average and Eastern Ukraine having slightly higher than average cash income. The general changes in income were the same for all regions. The rate of growth in of total income in rural areas was lower than in urban areas, but cash component of income increased faster in rural Ukraine. Both developments reverse the pattern of poverty that was described in the 1996 Ukraine Poverty report (World Bank 1996). These are all positive trends, but growth and profitability the agri- cultural sector will need to be maintained in order for this trend to continue. Given the levels of rural unemployment and under employment, future trends in rural poverty will need to be closely monitored. For both rural and urban households the share of salaries in cash income continued to decline in 1999­2001 (Table 8.2). Reduction in relative contribution of salaries in cash income resulted in a situation where social transfers (mostly pensions) became the major source of cash in rural and urban Ukraine. Income and expenditure profiles for average urban and rural households in 2001 are summarized in Annex 5 Table A5.3, which provides a detailed account of the struc- ture of rural and urban income and expenditures in 2001.68 In Ukraine, expenditures are found to be considerably higher than money income for all types of household (more than 20% higher for urban and 8% higher for rural households). The two reasons that are usually suggested to explain the difference69 are under-reporting of income and higher than reported share of own food production and private transfers in a typical household budget (Clarke). 68The data is for the first 9 months of 2001. 69 Whatever the explanation is, the discrepancy of such a magnitude between income and expenditures puts some limitations on accuracy of the survey data. 118 Achieving Ukraine's Agricultural Potential The following are some interesting observations about the level and structure of rural income and expenditures in 2001: Rural incomes are not significantly different from the national average, based on the findings of the household survey. However, income reporting is notoriously inaccurate. Expenditure levels per capita suggest that rural incomes (estimated from expenditures) are significantly lower than urban incomes. There are no significant regional differences in income distribution. Non-cash component of income for rural household is much higher than for urban households Rural households generate most of their income from the household food produc- tion. Average rural household produces US$35 worth of food per month, of which they consume an equivalent of US$24 and sell US$11 worth of food for cash. Another item that is relatively more important for rural households is income from ownership of assets. In 2001, rural households earned US$4.24 each month in rent and dividends, which is 27% higher than the national average. This is the result of the land reform that provided rural residents an opportunity to rent their land out. Land ownership gave rural households a sizable stream of cash income. It is equivalent to about 25% of their cash salaries or about 40% of cash that rural households generate from sale of food from household plots. Rural households generate 13% less primary income than urban households, es- pecially in the form of salaries from primary job (-43%) and income from pri- vate business (-38%). Rural households receive slightly less social transfers than the average household in the country (-6%). Rural households also receive 50% less subsidies for housing and utilities, transportation, vacations, etc than the average household in Ukraine. Rural households get much less of cash assistance from relatives than the average household in Ukraine (-35%) and about the same amount of in-kind food as- sistance. Rural households have been much more generous in assisting their rel- atives than the average household in the nation. They spend 33% more than the average household on assistance to relatives. The amount of monthly assistance that they provided (US$8.03) was also higher than the sum of cash and in-kind assistance that they received (US$6.86 each month). Rural households spend about 70% of their income on food. Their expenditures on services and non-food items are much lower than the national average (37% and 21%, respectively). Such spending patterns fit well with the "more cash con- strained, but relatively more food secure than urban household" model (World Bank 1996) of the rural household. Distribution of incomes The rural poor, (those having below median per capita income) usually have higher total (cash and in-kind) income than the urban poor. For higher than median level of per Rural Livelihoods and Rural Poverty--Assessment and Solutions 119 capita income group, urban residents earn more income than rural residents. The dis- tribution of income for both categories of residents is skewed towards lower income, i.e. median income is lower than mean income. About 45% of rural residents have in- come below the median and almost 60% below the average. The shape of the distribu- tion of per capita income for rural and urban residents is very similar (Figure 8.1). The distribution of income (measured in terms of yearly expenditures) among rural households is shown in Figure 8.2. It shows a relatively flat distribution for rural F I G U R E 8 . 1 Distribution of Total per Capita Monthly Income, 2001 (Q1­Q3), U.S. Dollars 16.0 14.0 12.0 10.0 households 8.0 of 6.0 cent r 4.0 Pe 2.0 0.0 6 11 17 23 29 34 40 46 51 57 63 68 74 80 86 91 97 103 108 114 120 Per capita total income per month Urban Rural Source: Author's Calculations Based on Household Survey. F I G U R E 8 . 2 Percent Deviation from the Mean of Yearly Expenditures of Rural Households by Deciles 150 100 50 0 1 2 3 4 5 6 7 8 9 10 -50 -100 1999 2000 2001 Source: Author's Calculations based on Household Survey. 120 Achieving Ukraine's Agricultural Potential Ukraine. The ratio of the average income level of the richest 10% of households and the overall average rural income is about 130%, while the ratio of the average in- come level of the poorest 10% households and the average of all rural incomes is about (70%). The distribution of incomes during 1999­2001 changed in favor of the wealthiest households, mainly in the ninth and tenth decile ranges. For all other decile ranges, the gap between their incomes and the average income in rural Ukraine increased, indicat- ing a relative worsening of their financial situation. The trend is disturbing, given the fact that 1999­2001 was a period when economic growth resumed, indicating that the wealthiest rural residents were able to capture most of the benefits associated with eco- nomic growth in agriculture. Rural Poverty and Vulnerability Based on the results of the recent Bank poverty assessment, the headcount poverty rate was 29% in 1999, rising to 32% in 2001 and finally falling to 26% in 2002 (Table 8.3).70 From this table, it is clear that rural poverty has not decreased as significantly in rural areas as it has in urban areas. This could be an indication that there is persistent poverty in rural areas that is not reduced by the economic growth seen in 2001 and 2001. This is further supported by an analysis of vulnerability rates by location between 1999 and 2001 (Table 8.4), which shows that there is a greater share of the rural population in chronic poverty than the urban population, and that this share is increasing in rural areas and small towns, while declining in urban areas. These trends should be of con- cern to the Government in developing a strategy to alleviate social problems in rural areas and to develop policies that generate employment in rural areas. Differences in income for various categories of rural residents The structure of income for several categories of rural residents--average rural residents, members of farm enterprises, pensioners, rural residents in poorest and wealthiest T A B L E 8 . 3 Ukraine: Headcount Poverty and Extreme Poverty Rates By Location, 1999­2002, Three Quarters 1999 2000 2001 2002 Kyiv City 11.3% 12.9% 8.9% 7.7% Large Cities 31.5% 31.1% 29.5% 21.6% Small Cities 30.2% 28.8% 32.4% 26.9% Rural Areas 29.8% 31.1% 32.4% 31.3% Total 29.4% 29.4% 31.6% 25.6% Source: World Bank 2003 based on household survey data. 70In 2001 based on the definition used in this report, 31% of the population was poor. The differences in poverty rates using partial year data and full year data are related to changes in the inflation rate, and perhaps, consumption over a year. Rural Livelihoods and Rural Poverty--Assessment and Solutions 121 T A B L E 8 . 4 Ukraine: Vulnerability Rates, Location, 1999­2001 (% Population) Location 1999 2000 2001 Kyiv City Chronic Poverty 0.00 0.00 0.00 Transient Poverty 12.39 13.13 8.02 Vulnerable Non-Poor 0.00 0.00 0.00 Large City Chronic Poverty 3.99 4.58 3.72 Transient Poverty 26.96 27.49 24.47 Vulnerable Non-Poor 4.39 4.30 4.41 Small City Chronic Poverty 3.12 3.64 5.62 Transient Poverty 26.96 25.79 25.92 Vulnerable Non-Poor 4.58 4.89 8.08 Rural Areas Chronic Poverty 4.18 7.26 11.07 Transient Poverty 24.25 24.62 24.81 Vulnerable Non-Poor 6.89 9.51 13.58 Source: World Bank, 2003 from Household Survey 1999­2001. deciles, very poor rural residents,71 poor rural residents,72 and non-poor rural residents73 is described in Table A5.13 in Annex 5. For average rural residents, members of farm enterprises and pensioners, the maximum amount of income for each source is also pre- sented. For example, households where the head is a pensioner are 14% poorer than av- erage. Households where the head is the member of a farm enterprise have 20% higher income then average. Table A5.14 in Annex 5 shows that households in lowest decile receive about 50% less of the social benefits than average rural household. Households in highest decile receive 2.4 times more social benefits than the average rural household. Non-poor households get 20% more social benefits than the average. Table 8.5 shows that the structure of income is similar for most of the categories of rural households. About 20­25% of income is generated by working as an employee in agricul- ture, another 40­55% comes from subsidiary plot and another 15­25 % from pensions. It is also interesting to note that the level of social benefits that the richest (10% wealthiest) rural residents received is equal to 9% of their income, which is higher than for the poor- est households, indicating that there may be a problem in targeting social benefits. Identification of the socially vulnerable types of households Given that economic resources that government could spend on social support are lim- ited, an efficiently designed social policy should take into consideration the distribution of income and other means of livelihood. Information is needed for social benefits to be targeted toward those households and individuals who do not have enough financial, 71Households with expenditures below 60% of median expenditures. 72Households with expenditures below 75% of median expenditures. 73Those with incomes above the poverty line. 122 Achieving Ukraine's Agricultural Potential T A B L E 8 . 5 Structure of Income for Different Categories of Rural Residents in 2001 (%) Household head Rural memb. of Household head Lowest Highest Very household ag. enterprise is Pensioner Decile Decile poor Poor Non-poor Ave. Ave. Ave. Ave. Ave. Ave. Ave. Ave. Salary 22 25 10 21 22 21 20 23 in cash 21 21 10 20 20 20 18 21 in kind 1 4 1 2 1 2 2 1 Dividends/compensations 0 0 0 0 0 0 0 0 Production from agriculture 44 54 45 35 46 36 39 45 in kind (traded) 15 22 14 10 18 10 12 16 in kind for household consumption 29 32 31 25 27 26 28 29 Self-employment activities 2 1 1 1 2 2 2 2 Pensions 17 6 30 24 12 24 24 15 Scholarships/stipends 0 0 0 0 0 0 0 0 Unemployment Benefits 0 0 0 0 0 0 0 0 Social benefits 6 4 6 6 9 5 5 6 Income earned by children 0 0 0 0 0 0 0 0 Help received from family and friends 7 6 6 8 7 7 7 7 in cash 3 2 2 2 3 2 2 3 in kind 4 3 3 6 4 5 4 4 Rental income 2 3 2 4 1 3 3 2 Sales of non-real estate assets 0 0 0 0 1 0 0 0 Sales of real estate 0 0 0 0 0 0 0 0 Total income 100 100 100 100 100 100 100 100 Source: Household Survey. physical, and natural resources to take care of their immediate needs. In Table 8.6 dif- ferent types of households from rural Ukraine are ranked by poverty quotient for 2001. The poverty quotient is the measure of relative representation of a particular household type in the population of households. It is calculated as a ratio of two shares: the share of a particular household type within the category of poor households and the share of a particular household within the category of all households. The score of 1 and higher means that a particular category of households are over-represented relative to the num- ber of these households in total population of households. The results show that the most vulnerable (poorest) households in rural Ukraine have the following social- demographic characteristics: head of the household is unemployed; households have three or more elderly people or children; households consisting of single elderly male or single parent with children; households with single or no income earners. Table 8.6 shows that in 1999­2001 the poverty quotient increased for 9 out of 14 most vulnerable households and declined for 5 out of 13 least vulnerable households. That may indicate that the conditions of the most vulnerable households were deteriorating in 1999­2001. Households with single elderly male, one child, or unemployed head of the household showed significant increase in the poverty quotient. Households with a single elderly male or with one child moved into the category of vulnerable households Rural Livelihoods and Rural Poverty--Assessment and Solutions 123 T A B L E 8 . 6 Poverty Quotient Change Over Time for Very Poor Households, in Rural Areas Type of households 1999 2000 2001 Labor Market Status of Household Head--Not working at all during a year 1.24 1.28 1.61 Number of Children in Household--Three or more 1.49 0.76 1.61 Single Parent with children 1.41 1.14 1.56 Single elderly male (over 65) 0.86 0.75 1.26 Number of Income Earners in Household--One 1.06 0.84 1.23 Number of Children in Household--One 0.86 0.85 1.17 Household Head (gender)--Female 1.16 1.18 1.16 Number of Elderly in Household--One 1.24 1.23 1.15 Other households with children 0.91 0.84 1.07 Gender of Rural Population (by individual)--Male 1.09 1.11 1.07 Number of Income Earners in Household--Zero 1.21 1.20 1.05 Other households without children 1.07 1.12 1.03 Number of Elderly in Household--Zero 0.81 0.86 1.03 Labor Market Status of Household Head--Retired 1.21 1.12 1.00 Single elderly female (over 65) 1.22 1.28 0.99 Gender of Rural Population (by individual)--Female 0.93 0.91 0.95 Number of Children in Household--Zero 1.05 1.09 0.93 Number of Elderly in Household--Three or more 0.86 0.83 0.92 Number of Children in Household--Two 0.87 0.91 0.89 Household Head (gender)--Male 0.87 0.84 0.85 Labor Market Status of Household Head--Employed all year 0.69 0.77 0.76 Number of Income Earners in Household--Three or more 0.34 0.86 0.75 Number of Income Earners in Household--Two 0.73 0.84 0.71 Number of Elderly in Household--Two 0.97 0.88 0.67 Multiple elderly 0.84 0.85 0.64 Labor Market Status of Household Head--Self-employed 0.49 0.00 0.59 Labor Market Status of Household Head--Employer all year 0.00 0.00 0.00 Source: Author's Calculations from the State Committee of Ukraine for Statistics Household Survey data. in 2001. Households with a retired head or a single elderly female managed to move out of the category of vulnerable households in 1999­2001. Households with two or more elderly improved their standing significantly. Patterns of Food During 1990­1999, consumption of all food products decreased due to a fall in real in- Consumption in the comes of Ukrainian consumers (Figure 8.3). Resumption of economic growth in 1999 1990s and 1999­2001 brought some positive changes to food consumption patterns. In 2000­2001, con- sumption of the cheapest sources of protein (milk and eggs) and vegetables increased, while meat consumption continued to decline despite the economic recovery. Differences in food consumption patterns in rural and urban Ukraine in 2000 are de- picted in Table 8.7. Rural households consumed more milk (by 33%), potatoes (by 46%) and bread (by 7%) than average household in Ukraine, but less meat (3%), fruits (30%), eggs, fish, and vegetable oil (16­21%). Per capita calorie intake by the rural population was 4% higher than the country average. Protein per capita intake was also higher by 8%, mostly due to higher milk consumption. The poverty problem in Ukraine is essentially a food security problem since more than 60% of household income is spent on food. Given that the level of food consumption and nutrition in rural Ukraine is better than average for the country, the level of poverty in rural Ukraine may not be as severe as it is shown by poverty indicators based on consumer income and expenditure statistics. 124 Achieving Ukraine's Agricultural Potential F I G U R E 8 . 3 Per Capita Food Consumption Trends (kg) 400 350 300 250 200 150 100 50 0 Bread Vegetables Meat Milk Eggs (pcs) Vegetable oil 1990 1995 1998 1999 2000 2001 Source: State Committee of Ukraine for Statistics, 2002. T A B L E 8 . 7 Food Consumption in Urban and Rural Households in 2000 (kg per person per month) % Deviation from average All Urban Rural Urban Rural households households households households households Meat and meat products 3.3 3.3 3.2 0 -3 Milk and milk products 17.1 15.4 20.5 -10 33 Eggs (number) 18 20 16 11 -20 Fish 1.3 1.4 1.1 8 -21 Sugar 3.5 3.5 3.5 0 0 Vegetable oil 1.8 1.9 1.6 6 -16 Potatoes 10.4 9 13.1 -13 46 Vegetables 9.5 9.7 9.3 2 -4 Fruits 2.5 2.7 1.9 8 -30 Bread and products 10.7 10.5 11.2 -2 7 Source: Ukrainian Statistical Yearbook for 2000. Human Capital in Rural Ukraine Changes in Rural About 32% of Ukrainians live in rural areas. The demographic characteristics of the rural Demographics population were constant throughout the 1990s. In 1991­2001, the rural population in Ukraine decreased at a slightly higher rate (-7%) than the total population (-5%). The share of pensioners, economically active population, and women in the rural population was stable at 29%, 50%, and 54%, respectfully (Table 8.8). The rates of ageing of the rural population exceeded the average indicators for the country. As a result, the demographic load in rural regions in 1999 increased to 1,019, Rural Livelihoods and Rural Poverty--Assessment and Solutions 125 T A B L E 8 . 8 Demographic Information about Rural Population, January 1 of Each Year (thousands) 1991 1996 1997 1998 1999 2000 2001 2002 Total population 51690 51079 50639 50245 49851 49456 49037 48206 Rural population 16895 16537 16408 16264 16124 15950 15790 15940 Rural population (% of total) 33 32 32 32 32 32 32 33 Rural population by age: under the age of economically active population 3626 3572 3513 3433 3328 3220 n.a. at the age of economically active population 8305 8091 8038 7986 7987 7998 8051 n.a. older than the age of economically active population 4821 4798 4767 4704 4625 4520 n.a. Rural population structure (%): under age of economically active population 22 22 22 21 21 20 n.a. economically active population 49 49 49 49 50 50 51 n.a. older than age of economically active population 29 29 29 29 29 29 n.a. Population by gender--% Female 54 53 53 54 54 54 54 54 Source: Pugachov (2002) The Demographic Characteristics of Rural Ukraine. T A B L E 8 . 9 The Balance of Rural Population, thousands % Change 1996­2000 1991­1995 1996­2000 compared to 1991­95 Number of newborns 996 797 -20 Number of deceased 1511 1506 0 Balance -515 -708 38 Moved into rural areas, total 1802 1300 -28 Moved into rural areas, economically active 1373 950 -31 Moved out of rural areas, total 1393 1059 -24 Moved out of rural areas, economically active 1074 787 -27 Source: Pugachov (2002) The Demographic Characteristics of Rural Ukraine. compared to only 652 in urban areas. That means that in rural areas for each person of employable age there is more than one person who is too young or too old to work and must be supported by working adults (UNECE 2003). The number of young rural residents declined between 1996 and 2001 at a higher rate (11%) than the total rural population. The major reason for reduction in young pop- ulation was 20% decrease in number of births (Table 8.9). The decline in number of births was partly due to legitimate concerns of family members about the well-being of a newborn in times of economic hardship, and partly because of low fertility rates caused by infectious diseases and alcohol abuse. If this trend continues over longer period of time, the shortage of young farm workers that could be trusted to operate relatively sophisti- cated and expensive agricultural machinery can limit the potential of rural economy for sustainable growth. During the 1990s, the death rates in rural Ukraine did not change. Migration from and into rural areas decreased during the 1990s, especially among eco- nomically active adults. The net migration to rural areas was positive, i.e. the number of those moved into rural areas was higher than the number of those who moved out. How- ever, the net gain in rural population due to migration decreased from 400 thousand in 126 Achieving Ukraine's Agricultural Potential 1991­95 to 250 thousand in 1996­2000 (Table 8.9). Older (over 60 years old) women are the most typical representatives of rural population in Ukraine (Figure 8.4). Quality of The quality of human capital is determined by the level of education and work experi- Human Capital ence. The educational level of the heads of rural households is lower than in urban areas. The gap is especially wide at college level of education. The share of household heads with high school diploma is higher in rural than in urban areas. About 6% of rural pop- ulation is still illiterate or did not finish elementary school. The rural-urban gap in level of education is still significant (Figure 8.5). Employment The structure and level of employment are important characteristics of human capital utilization. The total labor resources in rural Ukraine remained unchanged in 1990­2000. However, the composition of labor use changed significantly during that F I G U R E 8 . 4 Age and Gender Distribution of Rural Population 35 30 25 tne 20 Females Males Perc15 Total 10 5 0 0 ­ 14 15 ­ 19 20 ­ 29 30 ­ 39 40 ­ 49 50 ­ 59 60 and older Source: Ministry of Agricultural Policy, 2001. F I G U R E 8 . 5 Education Level of the Head of Household, 2001 40 35 30 ds ol 25 eh 20 hous of 15 % 10 5 0 College or Technical High school Middle Elementary Illiterate graduate school school school college Urban Rural Source: Ministry of Agricultural Policy, 2002. Rural Livelihoods and Rural Poverty--Assessment and Solutions 127 T A B L E 8 . 1 0 The Structure of Rural Employment 1990 1999 2000 thousand % thousand % thousand % Total economically active population in rural areas 7808 100 7827 100 7824 100 Including Farm enterprises 3715 48 2317 30 2270 29 Private farms 65 1 74 1 Household farms 1408 18 1784 23 1877 24 Social services 1235 16 901 12 828 11 Industry 608 8 246 3 154 2 Other (trade, services) 542 7 769 10 782 10 Registered as unemployed 0 240 3 253 3 Students 300 4 237 3 254 3 Unemployed 0 0 1269 16 1333 17 Pugachov (2002) The Demographic Characteristics of Rural Ukraine. period (Table 8.10). Industrial jobs in rural areas were affected the most: 75% or 0.5 million of these jobs were lost in 1990­2000. Former collective farms lost almost 40% of their labor force or 1.5 million people. Employment in social services contracted by 33%, losing 0.4 million people. Another 0.4 million people from rural areas lost their usually well-paid jobs in nearby cities (Pugachov 2002). The total number of people from rural areas that lost their jobs was about 2.8 million. Only an estimated 0.4 out of the 2.8 million of displaced people were absorbed back into formal employment. The rest were absorbed into subsistence agriculture.74 However, most of them are not re- gistered as unemployed and, therefore, are not entitled to unemployment benefits. According to the State Committee of Ukraine for Statistics, only 253 thousand un- employed are officially registered in the countryside. These estimates are substantiated by another study which estimated the number of fully or partially unemployed villagers at 2 million, including 1 million unemployed and 0.95 million partially employed (Ukraine 2000, p 1­7). The lack of income earning opportunities in rural areas is the root cause of rural poverty. During the 1990s, the list of employment options for rural residents declined. Most of the income in rural areas is still related to agriculture : more than 54% of rural residents in 2000 were employed on farm enterprises, private farms or household plots (Table 8.10). The near-term outlook for rising agricultural share of employment in rural areas is grim. The restructured agricultural enterprises no longer provide job guarantees. New owners are reluctant to keep the same amount of workers on reorganized farms. They are much more profit oriented and are not willing to sacrifice profits for higher employment. There are numerous reports of violation of labor laws by new farm own- ers (Seperovich 2002). For example, new owners often pay less than minimum wages to agricultural workers. They argue that they did not pay minimum wages because of 74The terms of employment in household production, which is basically a type of subsistence farming and a form of hidden unemployment, can hardly be compared with regular type of employment in terms of job satisfaction, ben- efits, prestige, etc. 128 Achieving Ukraine's Agricultural Potential T A B L E 8 . 1 1 Structure of Employment by Type (%) 1999 2000 2001 Hired employee 52.0 59.0 64.7 Member of agricultural enterprise 44.1 36.6 30.0 Employer 0.3 0.3 0.3 Self-employed 3.4 3.8 4.7 Unpaid family worker 0.2 0.3 0.4 Total 100.0 100.0 100.0 Source: Household Survey the low quality of the existing pool of labor force in rural areas.75 New owners are also less likely to conclude collective agreements with labor unions. In 2000, only about 64% of agricultural workers were covered with such agreements compared to almost 100% in previous years. The data from the Household Survey show that the level of employment in agri- culture declined from 47% of total employment in 1999 to 42% in 2001. The eco- nomic growth in the agricultural sector in 2000­2001 was achieved with fewer workers employed. In 2000­2001, such sectors as trade, industry, and social services (education and health care) showed some small gains in the relative number of employed. Em- ployment opportunities in construction, transportation, and community services de- clined. Thus it is hard to conclude that the economic recovery of 2000­2001 resulted in diversification of income generating opportunities in rural areas as one may have ex- pected. There are still not a lot of alternatives to agricultural activity in rural areas. A visible and sizable recovery of rural non-agricultural activities such as services, small- scale processing, etc., has not yet materialized. Rural areas still lack most of the services and non-agricultural business activities (shops, gas stations, etc) that are a necessary and integral part of rural life in market economies. Table 8.11 also shows how the rural population classify their employment status. An increasing number of those employed in rural areas consider themselves as hired workers. A declining number consider themselves to be members of agricultural enter- prises. This is an indication that there is increased separation of the labor function from membership status in a collective. The number of the self-employed increased signifi- cantly in rural areas in 1999­2001, but they still constitute very small proportion of total employees. Holding multiple jobs is another coping strategy that can be employed by house- holds in order to earn a living. The percentage of respondents of the Ukraine's house- hold survey that report that they hold a second job is much higher in rural than in urban areas--11% vs. 1%.76 That may mean that there are relatively more opportunities for holding multiple jobs in rural areas than in urban areas, although it is likely that these jobs are in agriculture. 75For example, managers claim that it is hard to find well-qualified and reliable operators of agricultural machinery. 76Labor Market Survey. Rural Livelihoods and Rural Poverty--Assessment and Solutions 129 T A B L E 8 . 1 2 Ownership of Rural Housing, million square meters 1990 1995 1996 1997 1998 1999 2000 2001 Housing stock State and Cooperative and Communal 41 24 22 21 20 19 18 15 Private 307 338 343 347 349 353 356 358 Total Rural Housing 348 362 365 368 369 371 373 373 Rural housing per resident, square meters 21 22 22 23 23 23 24 23 Structure of rural housing (%) State and Cooperative 12 7 6 6 5 5 5 4 Private 88 93 94 94 95 95 95 96 Total Rural Housing 100 100 100 100 100 100 100 100 Housing construction (1000 square meters) New Houses built 3423 2207 1405 1397 1175 1272 1229 1166 including privately built housing 1858 1607 1100 1153 1016 1158 1160 1103 % privately built 54 73 78 83 86 91 94 94 Source: State Committee of Ukraine for Statistics, 2001. Social and Economic Situation of Rural Settlements in Ukraine: Statistical Yearbook, 2001. Opportunities to Social services can be viewed as an investment into human capital. Education and health Improve Human services help to improve and maintain the quality of human capital. During the 1990s, Capital the opportunities for rural residents in Ukraine to accumulate and improve human cap- ital were decreasing. Rural social infrastructure continues to deteriorate as a result of cuts in financing from both agricultural enterprises and the government. During 1990­2000 about one third of pre-school establishments were closed. The number of schools stayed the same in 1990­2000, but attendance at rural schools decreased by 15%­20%. There was also a 15% decline in the number of cultural facilities in 1990­2000.77 Investment in construction of new social assets in rural Ukraine declined at a very high rate in the 1990s. In 2000, new school construction was at 14% of the 1990 level. Investment in health, cultural facilities and pre-school facilities, contracted even more (to 8%, 3% and 2% of 1990 level, respectively). The availability of social services in rural Ukraine is very low. Almost half of rural settlements do not have any school: two thirds do not have a kindergarten. Medical doctors are available only in 8% of rural settlements, nurses in 56% (Ukraine 2001). While this may be an adjustment to a more efficient use of resources for day care, education or other social services, if these trends continue they could result in declining opportunities for rural residents to improve their human capital in the future. Physical Capital in Rural Ukraine Rural housing stock Rural residents in Ukraine also possess physical assets, such as houses, agricultural ma- chinery, passenger cars, cattle, etc. Private ownership of housing increased in Ukraine between 1990­2001 by about 16%, while the stock of housing in non-private property declined by 57%. In 2001, about 95% of rural housing was in private property, and only 5% was in possession of municipalities (Table 8.12). The share of new houses built by private owners increased from 54% in 1990 to 94% in 2001. 77See Chapter 6 for more comprehensive discussion of the social infrastructure in rural Ukraine. 130 Achieving Ukraine's Agricultural Potential F I G U R E 8 . 6 Distribution of Housing Stock in Rural Areas by Year of Construction 60 50 40 30 Percent 20 10 0 before 1943 1944-1970 1971-1980 1981-1990 1991-1995 1996-2000 Source: State Committee of Ukraine for Statistics, 2001. Social and Economic Situation of Rural Settlements in Ukraine: Statistical Yearbook, 2001. The quality of housing stock is not very high, and many rural houses are old (Fig- ure 8.6). More than 50% of houses have been built 30­50 years ago. About 15% of rural houses were built during or before World War II. Construction of new houses all but stopped in the 1990s. In 1996­2000, the housing stock in rural areas increased only by 1%. Other physical capital (agricultural machinery, passenger cars, etc) One of the benefits of reorganization of the former collective farms was that some of the rural residents managed to acquire pieces of agricultural machinery. There are about 80 thousand tractors in household plot sector or one tractor per 80 plots, and 10 thou- sand grain combine harvesters or one combine harvester per 640 plots (APHD 2001). The ownership of passenger cars among rural residents78 is 15.6%, which is slightly higher than for the general population (15.2%). About 10% of rural residents own mo- torcycles, compared to 5.8% for general population. A large proportion (more than 90%) of rural population have cattle and/or poultry. The stock of animals in rural households increased between 1999­2001. One issue that could potentially lead to an increasingly skewed distribution of wealth in rural areas has been the slow pace of the distribution of non-land asset shares of former collective farms. The Government has established a procedure for non-land asset distribution, but because of the difficulty of splitting large assets, particularly barns and other fixed assets, and the disincentive for farm managers to loose control of these assets, the distribution of these assets has been slow and uneven amongst rural residents. In some cases dividend or rental payments are made to former collective farm members. These assets are generally controlled by a limited number of people in each former col- lective farm or its successor. 78Household Survey. Rural Livelihoods and Rural Poverty--Assessment and Solutions 131 Commonly owned assets and access to markets One of the anomalies of the post Soviet rural economies is that there are still a large number of shared assets, or assets that have joint ownership, e.g., land share certificates to undivided fields of former collectives. Communal grazing areas is another example to which certain individuals have common rights. Access to agricultural inputs by being a member of a community may also be a major asset that determines a persons level of rural livelihood. Rules and regulations that govern use of communal grazing areas are vital to the ability of rural households to feed their cattle and provide subsistence to their families. For example, Holt (2002) found in a series of focus group surveys that many respondents commented on the importance of selling milk products to generate cash. Clearly, households that do not have access to communal grazing rights would not be able to graze cattle and would face a higher poverty risk. Access to communal markets may also be a major asset to rural inhabitants but ac- cess is often restricted by local officials through permitting requirements, high fees, or restrictions on movement of produce. Summary of Distribution of Human, and Physical Capital and Incomes Table 8.13 provides the distribution of some key indicators of human, natural, finan- cial and physical capital for average, poor, and very poor households. The following fac- tors appear to increase the risk of being poor in rural Ukraine. Low level of education. Incomplete primary schools education or being illiterate almost guarantees the poor status. The higher the level of education, the lower the probability of being poor. Those who do not possess land are very likely to be poor: 4% of the very poor in rural Ukraine are landless, compared to 1.3% in general rural population. Poor households tend to possess fewer land plots than general rural population. Poor households tend to rent out the land they possess more frequently than the general rural population. Poor households are less likely to possess livestock: 27% of the very poor do not own livestock, compared to 12% in the general rural population. Poor households do not produce food on the household plot for sale, most of that food is consumed within the household. Data in Table 8.13 show that rural poverty could be targeted by providing opportuni- ties for education, increasing land and livestock possession among to the poor, orga- nizing marketing channels for sale of food that is raised on household plots. Policy Recommendations for Improving Rural Livelihoods Create off-farm employment in order to absorb the enormous surplus of labor in rural areas. Promoting the development of a rural services industry, such as trad- ing of commodities, machinery repair, input supply companies, local shops etc 132 Achieving Ukraine's Agricultural Potential T A B L E 8 . 1 3 Poverty Profile of Rural Households in 2001 Poverty Quotient*** % in Total % in poor % in very poor Poor Very poor Rural Population households* households** households* households** HUMAN CAPITAL Age in Years 0­15 19.3 9.8 8.3 0.51 0.43 16­40 30.5 34.9 37.5 1.14 1.23 41­65 32.7 34.5 34.4 1.05 1.05 66+ 17.0 20.5 19.3 1.20 1.14 Education Level in of Household Head Illiterate 1.6 2.4 2.5 1.53 1.56 Primary (less than 7 years) 24.6 34.3 32.9 1.40 1.34 General Secondary (8­12 years) 54.9 47.8 49.1 0.87 0.89 Vocational or technical education 11.3 11.1 11.9 0.98 1.05 Higher Education (complete and incomplete) 7.4 4.1 3.5 0.55 0.47 PHYSICAL CAPITAL Possession of Land in Rural Areas Yes 98.7 96.9 96.0 0.98 0.97 No 1.3 3.1 4.0 2.42 3.08 Possess Livestock Yes 88.4 77.9 72.9 0.88 0.82 No 11.6 22.1 27.1 1.91 2.34 Number of Land Plots 1 plot 37.0 38.7 40.7 1.05 1.10 2 plots 35.7 36.5 35.9 1.02 1.01 3 plots 26.0 21.7 19.4 0.83 0.75 Don't Know or not answer 1.3 3.1 4.0 2.42 3.08 Ownership of Car (per household) Yes 15.3 6.7 5.3 0.44 0.35 No 84.7 93.3 94.7 1.10 1.12 INCOMES Agricultural Sales and Home Consumption Goods produced only for home consumption (not sales) 67.8 67.9 68.5 1.00 1.01 Mixed production (for home and sale) 16.8 13.0 10.6 0.77 0.63 Mostly grown for sale 0.3 0.2 0.0 0.93 0.00 Land lent or rented out (including free of charge) 14.4 18.2 20.1 1.26 1.39 Other 0.7 0.7 0.8 1.12 1.19 *Households with 75% of median per capita expenditures. **Households with 60% of median per capita expenditures. ***Poverty Quotient = (% of a particular type of rural household in total number of poor rural households). Source: Household Survey. will be important for improving incomes in rural areas. The Government role in promoting these activities would be to minimize administrative requirements and fees for starting and operating small businesses, and providing appropriate train- ing programs for small business operators. Promote family farming in order to increase employment in rural areas. Family farms generally farm more intensively than large agricultural enterprises and ab- sorb larger amounts of labor. Smaller family farms also make more use of off farm Rural Livelihoods and Rural Poverty--Assessment and Solutions 133 services such as repair shops, input supply and marketing agents, thus increasing off-farm employment. Encourage the equitable distribution of asset ownership. The Government's land reform program is an excellent example of achieving equitable asset distribution. Land asset ownership is becoming a major contributor to rural incomes, and is a factor in mitigating rural poverty. Ownership of livestock is also a major factor in mitigating rural poverty. The slow pace of distribution of the non-land assets of collective farms could have the effect of concentrating assets in the hands of a small number of individuals and thus skewing future income distributions. The distribution of non-land assets should therefore proceed as quickly as possible. Develop and implement a rural education strategy and ensure adequate budget funding. Providing good education to rural inhabitants is important for two main reasons; a) many of this generation of rural school children will migrate to urban areas, and it is important that they are well-educated in order to prevent this migration from becoming an urban social problem; and b) modern agricul- ture requires a well educated work force. Develop a national strategy for rural health care and ensure adequate budget funding. Improving health care in rural areas is an important component of the social safety net for the rural population. Introduce targeted social safety net programs to the most vulnerable groups rather than broad based subsidies to large segments of the populations. In fact, higher income individuals are currently receiving a disproportionately high share of social services. Households in the highest income decile receive 2.4 times more social benefits than the average rural household. C H A P T E R 9 Rural Public Services Infrastructure D uring the years of central planning, collective agricultural enterprises (CAE) were the main providers of social services and utilities for the rural population of Ukraine. This situation is changing however. In 1999, Ukraine made a clear commitment to embrace private ownership of land and assets in rural areas. The decision to dismantle former kolkhoz/sovkhoz structures and promote creation of more efficient businesses in their place is resulting in significant changes in organization of the rural economy. These changes are expected to result in substantial modification in the traditional role that has been played by agricultural enterprises, local governments, and rural residents in provision of social services and development of rural infrastructure. New agricultural enterprises that are organized in place of collective farms are sup- posed to be more focused on maximization of profits and, thus, are not designed to ad- dress the social needs of the rural population. In market economies, local governments are institutions responsible for provision of social services and development of rural in- frastructure. Thus, it is expected that in Ukraine former collective farms will transfer so- cial assets and infrastructure to local governments. However, many local governments in rural Ukraine are not well prepared for their new role in rural development. Their ad- ministrative capabilities are weak. Local governments are also struggling to generate suf- ficient revenues that would enable them to accept these new responsibilities. In Ukraine, the revenues of local governments are highly dependent on transfers from the central gov- ernment. Therefore, the efforts to reform the public infrastructure in rural areas should be closely coordinated with changes in the intergovernmental financial relations and pub- lic finance reform. The complexity of the reform of rural social and public infrastructure in Ukraine suggests that the government has a very important role to play in develop- ment and implementation of a well-coordinated strategy of rural development. Inventory of Rural Public Infrastructure (Health, Education, Transport, Utilities and Public Market Infrastructure) Social Infrastructure The condition of rural public infrastructure in Ukraine deteriorated during the 1990s. Development This was the result of cuts in financing from both agricultural enterprises and the gov- ernment. Agricultural enterprises were not able to invest in rural infrastructure because 135 136 Achieving Ukraine's Agricultural Potential T A B L E 9 . 1 Social Infrastructure in Rural Areas (number of establishments) 2000 as % 2000 as % 1990 1995 1996 1997 1998 1999 2000 of 1999 of 1990 Schools 15096 15243 15152 15041 14990 14979 14916 99.6 98.8 Pre-School Organizations 12600 10900 10546 9700 9400 9400 8896 94.6 70.6 Club-Houses 20987 19756 19344 18389 18061 17900 17727 99.0 84.5 Medical facilities 16400 16400 16402 16402 16402 16402 16113 98.2 98.3 Source: Main Indicators of Social Development of Rural Areas in 2000. --Ukrainian Ministry for Agrarian Policy. Kyiv, 2001, p. 44. c. most of them were not profitable. The need to balance public finances and prevent in- flation limited the amount of resources that government could spend on social services. The demand for paid social services declined due to a negative income shock experi- enced by most of Ukrainian consumers in the 1990s. As a result, many public infra- structure entities have been closed. During 1990­2000, 30% of pre-school establishments and 15% of cultural facilities were closed (Table 9.1). The number of consumer service establishments in rural areas (barbershops, repair shops, etc.) contracted by 75%. The availability of social services in rural Ukraine declined considerably. Residents of half of the rural settlements in Ukraine do not have access to even a minimal set of social ser- vices. About 12% of Ukrainian villages do not have any social establishments (schools, hospitals, cultural facilities) at all (Ukraine 2001). Almost half (47%) of the rural set- tlements do not have secondary schools; two thirds (62%) do not have a kindergarten and 37% lack any medical facilities(Ukraine 2001). Although official statistics show that the numbers of schools and medical facilities remained the same throughout the 1990s, the capacity utilization and the scope of ser- vices that these institutions provide declined considerably. In 1990­2000, attendance at rural schools decreased by 15%­20%, which could be due to the declining number of school age children in rural areas, but needs to be factored into planning decisions for future school system investments. Many rural hospitals have been downgraded to nursing stations. By 2000, services of medical doctors were available only in 8% of rural settlements; nurses provided services in 56% of the villages (Ukraine 2001). The de- clining availability of medical services in rural areas is leading to premature mortality. Due to tight budgets, medications are not readily available at rural hospitals even if pre- scribed by a doctor. Patients are bearing the full cost of medicine if they can afford to buy it. Patients are even asked to bring their own food and linens when they need to stay in the hospital or nursing station. Rural residents frequently mention an illness of a relative as an example of a shocking economic event that many rural families have dif- ficulty to recover from due to high cost of medical services.79 Investment in construction of new social assets in rural Ukraine declined at a very high rate in the 1990s. In 2000, new school construction was only at 14% of the 1990 79Case studies of rural communities conducted in June of 2002 in four regions (oblast) of Ukraine by the World Bank. Rural Public Services Infrastructure 137 level. Investment in new health, cultural, and pre-school facilities contracted even more (to 8%, 3%, and 2% of 1990 level, respectively) (Table 9.2). While some of the reduc- tion in services may be a normal rationalization of these services as the economy moves from a planned economy to a market economy and changing population demograph- ics, the level and quality of services provided today has deteriorated to a level that jeop- ardizes the long term development potential of rural areas in Ukraine. The central government has an important role to play in ensuring that these services are provided at adequate levels. The Government needs to reorient its budget allocations from sup- porting agricultural enterprises as an indirect way of supporting social services in rural areas to directly financing public services in rural areas. Rural Physical During the years of central planning, the overall development policies were focused on Infrastructure urban industrial areas. Basic services, such as water supply, sewer systems, telecommu- Development nications, etc., were more developed in cities, towns, and larger villages, but not in the countryside. Rural dwellers have significantly lower levels of services and poorer infra- structure than do their urban counterparts (Figure 9.1). T A B L E 9 . 2 Development of Rural Social and Cultural Infrastructure 2000 as % 2000 as 1990 1995 1996 1997 1998 1999 2000 of 1990 % of 1999 2001 Schools capacity (1000 pupils) 61 18 12 8 11 12 9 14 74 6.7 Pre-School Organizations (1000 customers) 20 3 1 1 1 0.3 0.3 2 100 0.2 Health Facilities (patient units) 781 291 50 174 NA 100 65 8 65 40 Cultural Facilities (1000 customers) 32 4 1 2 1 1 1 3 83 0.4 Source: Statistical Yearbook of Ukraine--State Committee of Ukraine for Statistics, Kyiv, various years. F I G U R E 9 . 1 Housing amenities in Ukraine (2000) Natural Gas Central heating Running water Rural Urban Sewer system Hot water 0 10 20 30 40 50 60 70 80 90 Percent of families Source: Statistical Yearbook of Ukraine, 2000 138 Achieving Ukraine's Agricultural Potential In 2000, in urban areas, 75% of houses and apartments had running water, while only 18% did in rural areas. The urban-rural differences in development of sewer systems, hot water, and central heating are even larger. While two thirds to three fourths of houses in urban Ukraine have most of modern amenities, in rural areas only a few (5­18%) do. During the 1990s, some improvement in provision of utility services in rural areas have been made. Between 1990­2000, the share of villages that had pipeline natural gas service increased from 8% to 30%, and those that had running water--from 16% to 22%. However, the impact of these improvements on the livelihoods of rural residents was rather modest (Table 9.3). The pace of new rural infrastructure development slowed down considerably in the 1990s (Table 9.5). In 1999, new additions to the stock of rural infrastructure was only 17% of the 1990 level for water systems, and only 7% for roads. Such a drastic decline in road construction may limit the marketing opportunities for rural population and decrease attractiveness of rural areas for outside investors. Number of phones in rural areas increased in 1991­2000. However, the level of phone service coverage in rural Ukraine is still very low. Only about 18% of rural residents had phone service in 2000. The number of retail shops and canteens declined considerably--by about 50% be- tween 1991 and 1999. Such a negative trend may lead to a widening of the urban-rural gap and signal further deterioration in the quality of rural life. T A B L E 9 . 3 Number of Rural Settlements with Utility Services 1990 1995 1996 1997 1998 1999 2000 2001 Running water 4578 5760 6361 6448 6606 6625 6651 6616 Sewer system 813 865 871 880 868 856 841 834 Natural gas (portable and pipeline) 26532 27174 27155 27203 27192 27005 26893* 26901 Incl. pipeline gas 2428 5424 5733 6252 7290 7724 8584* 8321 Total number of rural settlements 28826 28837 28648 *Many communities use both pipeline and portable gas supplies. Source: Statistical Yearbook of Ukraine for 2001. --Kyiv, 2002. In 2001, about half of rural residents (6­7 million people) still did not have access to hot or running water, sewer systems. More than 9 million of rural residents (57% of total) did not have pipeline natural gas service (Table 9.4). T A B L E 9 . 4 Rural Residents with No Access to Utility Services, as of January 1, 2001 Hot Running Sewage Natural Gas Natural Gas water water system (pipeline) (liquefied) Telephone Number, 1000 persons 7667 6376 7321 9202 2028 1880 % of total rural population 48 40 46 57 13 12 Source: Social and Economic Condition of Ukrainian Rural Settlements: Statistical Book. --State Committee of Ukraine for Statistics, 2001, p. 194. Rural Public Services Infrastructure 139 T A B L E 9 . 5 Rural Infrastructure Development 1999 as 1991 1995 1996 1997 1998 1999 2000 % of 1990 Water System Network (km) 1909 914 488 356 393 327 17 Natural Gas Network (km) 5592 6611 4957 3658 3186 3537 63 Rural Motorable Roads (km) 9580 1798 763 798 860 628 294 7 Number of retail shops (1000) 66.9 51.7 48.1 43.3 39.3 35.5 33.4 53 Number of canteens (1000) 18.1 10.9 11.1 12 11.3 10.6 10.2 59 Number of phones (per 100 residents) 12 14 15 16 17 17 18 142 Source: Ukrainian Agriculture in 2000: Statistical Yearbook. --State Committee of Ukraine for Statistics, Kyiv 2001, p. 262. F I G U R E 9 . 2 Distribution of Rural Settlements by Size of Population, January 1, 2002 30 25 ents emlt 20 set 15 of 10 5 Percent 0 less than 49 50-199 200-499 500-999 1000 and more Population Source: State Committee of Ukraine for Statistics, 2002. The amount of resources that government can spend on social and physical infra- structure is very limited. The government is searching for more effective ways of pro- viding these services. The small size of rural communities makes the development of rural infrastructure more costly than in urban areas. The typical size of rural settlement is in the 200­499 range (Figure 9.2). About 40% of rural population live in settlements with less than 200 residents. It may be the case that for some of small communities pro- viding the whole set of social services as it used to be under central planning may be too costly. In fact one could expect a natural consolidation of social services from the situ- ation that existed in the FSU. Most market economies do not have a medical or edu- cational facility in every village. Consolidation may be a really good thing and improve the quality of teaching by locating the school in a larger village that would attract tal- ent. The debate about whether small rural settlements should be consolidated is under way. There is a trade-off between the economies of scale in provision of social services in larger settlements and the ability and willingness of residents of small villages to re- settle or bus students long distances. 140 Achieving Ukraine's Agricultural Potential Transfer of Public Assets from Farms to Local Municipalities The major arguments in favor of transfer. Historically, collective farms were respon- sible for providing social services in rural areas. The fact that the budget for social ser- vices is drawn from the operating profits or overhead has several major effects on current and future performance of the farm enterprise. First, it drains financial resources of the farms limiting their ability to generate profits (Shleifer and Boycko 1994). Second, it makes the books of a farm enterprise non-transparent. The latter may deter external in- vestors from providing working capital and/or buying an interest in an agricultural en- terprise. Third, continuing provision of social services also does not create proper incentives for farm management and can affect farm efficiency. Fourth, social responsi- bilities of CAEs may represent a major constraint to the progress of economic reform in agriculture. Transfer of social services to local governments is a necessary condition for trans- forming former collective agricultural enterprises into viable business-oriented firms. The first attempt to transfer social services to local governments was made in 1996 with the adoption of the Resolution of the Cabinet of Ministers of Ukraine No. 1060. According to the Resolution of the Cabinet of Ministers of Ukraine No.1060, all so- cial assets of CAEs were subdivided into three major groups according to their capacity to operate independently of state financing. Group 1 included retail stores, housing, public eating places, consumer services (repairs, sewing, etc.). It was assumed that that group could generate enough income for self-financing, and it was recommended that CAEs sell these establishments (privatize them). Group 2 was represented by utilities (water, gas, telephone, and electricity) and house maintenance. These services are supposed to be at least partly financed by the government, and it was expected that the government would compensate CAEs for supplying these services to rural residents. Group 3 was represented by social services that, according to the Ukraine's constitution, should be provided free of charge (kindergartens, schools, medical facilities, etc.). Hence, it was expected that cen- tral and local governments would take full responsibility for financing these services. In order to facilitate activities of reformed agricultural enterprises the President of Ukraine issued the Decree No. 398/2000 as of March 9, 2000 "On Certain Measures Aimed at Improving Conditions for Non-state-owned Agricultural Enterprise Activi- ties" providing for acceleration of the transfer of reformed agricultural enterprises' so- cial infrastructure facilities into communal ownership. The transfer of social assets is done according to the Law of Ukraine No. 147/98-VR as of March 3, 1998 "On The Transfer of State- and Communally-owned Facilities." The mechanism of transfer of social assets was different for the state farms and col- lective farms. The state farms (i.e., farms where assets are owned by the state) were or- dered to transfer their social assets to local governments free of charge. For collective farms, where members own the social assets, the voluntary transfer of their social assets to local governments was recommended. CAE could choose one of the following op- tions: transfer assets to the local government for free, sell social assets, rent them out, or liquidate them. Rural Public Services Infrastructure 141 The progress of transferring social services to local governments had been slow, partly because of the lack of a revenue base to support these services and partly because of the slow pace of agricultural enterprise restructuring. The 2001 State Budget ear- marked only 55.2 million hryvnia for the maintenance of social assets in rural Ukraine. By the beginning of 2002, (six years after the initial decision to transfer assets), slightly more than half of social and physical assets have been transferred. As of January 1, 2002, 48% of kindergartens, 50% of the housing, 54% of clubs, 58% of utility networks, 64% of medical institutions and 67% of schools, were transferred (Ukraine 2002). The re- sults of case studies suggest that even if social assets and infrastructure are formally (on the books) transferred to local governments, de facto agricultural enterprises are still fi- nancing and/or providing in-kind contribution to maintenance of social assets and rural infrastructure. The most typical examples of such support are repair of social assets; transportation of children to school; providing and subsidizing school lunches; man- agement of water and heating systems (for a fee). Two explanations may account for the relatively slow progress in transferring social services to local governments. First, the local governments are not able to accept re- sponsibilities for provision of social services due to an inadequate tax base. Second, some managers of CAE's are not willing to transfer social assets to local governments because that may undermine their power and curtail opportunities to improve their personal well-being. The role of a farm manager in transfer of social assets. A farm manager faces several trade-offs in the decision making process with respect to social assets. As reform progresses, managers are taking de facto control over the farm operations, and their in- come is becoming increasingly dependent on the farm's profits. Since farm profits are inversely related to the farm's social expenditures, a manager-owner has an incentive to eliminate these expenditures in the long run. However, in the short run, managers may decide to keep social assets for two reasons. First, managers need to maintain good re- lationships with rural residents from whom they that rent land. Second, managers are aware that local governments do not have enough revenues to finance social expendi- tures, and that sudden transfer of public infrastructure will put the whole community at risk. Interviews80 with the farm managers in Ukraine support the idea that the major reason why managers are still providing social services to rural communities is that they feel morally obligated to do so, especially given that nobody else (including local gov- ernments) is able or willing to assume that responsibility. Historically, CAEs rather than local governments played the major role both in gen- eration and re-distribution of rural taxes. One enterprise structure controlling one, two, or three villages, which was the pattern in Soviet times still remains a typical form of or- ganization for rural communities in Ukraine. As the data on farm restructuring shows, when former collective farms were provided an opportunity to divide their operation into several entities, on average only two new farm enterprises were created out of each CAE. Hence, a few farm enterprises still play a dominant role in economic development of a typical rural community. 80Interviews carried out in 2001 as case studies for preparing this chapter. 142 Achieving Ukraine's Agricultural Potential The size and organization of a typical farm enterprise in Ukraine is comparable to that of a small rural community in a developed market economy with one very impor- tant exception. In developed market economies, most of the economic activities in rural communities, such as supply of inputs, machinery repair, retail trade and catering etc., are performed by separate privately owned businesses that pay taxes to local govern- ments. In Ukraine, most of these economic activities are still centralized under the aus- pices of CAE or its successor. Concentration of these potentially independent businesses in the sole ownership or control of a farm enterprise limits the revenue base of the local government. Farm en- terprises as agricultural producers, are exempt from profit tax payments. Most of the private businesses that might have been created on the basis of CAE (input suppliers, ser- vices, trade) cannot be classified as agricultural producers and would be liable for paying a profit tax. Today, however, since they are the part of farm enterprises, they are not paying profit taxes, and local governments are losing potential revenues. Cross-subsidization of production when a profitable production or service unit of CAE is covering losses of unprofitable units is also widespread. Such practice masks the true performance indi- cators of farm enterprises and does not allow for the development of an efficient and equitable local government tax system. The role of local government in transfer of social assets and infrastructure. The transition from central planning to more economic and political decentralization has created challenges for local governments dealing with their new responsibilities and powers (Perrotta 1999). The willingness of local government to accept responsibility for providing social services depends on: a) their administrative capabilities, b) the rev- enue base of local governments, c) design of the local tax code, and d) the amount of income transfers that they can receive from the central government. Local governments in Ukraine do not have adequate administrative capabilities for delivering social services. Local governments in rural areas usually perform only simple administrative functions, such as registration of new residents, issuance of permits, etc. They do not have skilled workers and/or equipment to fulfill the functions of construction, repair and maintenance of social assets and utilities (Freinkman and Starodubrovskaya 1996). The revenue base of local governments in Ukraine is generated from four tax based sources (Sluhay 1999): a) local tax revenue; b) fixed tax revenue; c) regulated revenue; and d) transferred revenue. There are also non-tax based sources of revenue, such as land rent, which are becoming a significant source of revenue. The local tax revenue includes revenues that come from local taxes and duties col- lected from entities located on the territories under jurisdiction of local governments. The local revenues belong exclusively to a local government, i.e., are not shared with the upper level of the government. Local taxes and duties in rural Ukraine include parking fees; hotel duty; payment for trading place at farmers' market; taxes on gam- bling; payment for the right to conduct filming, auctions, or lotteries; communal and advertisement tax, etc. Most of these taxes are neither a reliable nor significant source of revenue because in many instances the administrative cost of collecting these local taxes is higher than the revenue that is generated. Out of 16 local taxes and duties, only Rural Public Services Infrastructure 143 a few generate considerable revenue: a communal tax, a hotel duty, a duty for a license to open a retail outlet, a payment for trading space at farmers' market, and an adver- tisement tax. In Ukraine, local governments have full discretion over local taxes. However, some of their taxes, for example real estate and property taxes, that usually constitute the major source of revenues for local governments in market economies are not in the list of taxes that local governments can levy in Ukraine. That results in loss of rev- enue base. It seems that local governments should have the authority to introduce and establish the rates for property taxes. Another problem with current tax legislation is that local governments do not have a clear idea about which businesses are subject to local taxes. For example, it may be the case that a business is situated on the territory of village rada, but is not subject to local taxes because the company is registered in another place. The fixed tax revenue refers to those national-level taxes and duties that are shared in fixed proportions between different levels of government on a permanent or long- term basis. For example, according to the results of the case studies, Novoukrainska rada in Donetsk oblast is entitled to 60% of the revenues that they received from renting out the lands of land reserve, 25% of fixed agricultural tax, and 25% of income tax that radas collect on their territory. The remaining portions of these taxes are transferred to the higher levels of the government. The regulated revenue consists of revenues allocated for purposes of financial equal- ization and balancing of local budgets. The existing tax system is designed in such a way as to balance and equalize budgets at all levels. That means that tax rates are highly dif- ferentiated across the regions. Poorer regions keep at their disposal larger shares of taxes than the richer territories. The exact terms of revenue sharing (including region-specific tax rates) are established by oblast and rayon authorities. That makes the revenue base of local governments non-transparent and dependent on the decisions of the higher lev- els of the government. Moreover, since there is no unambiguous determination of a list of sources of fixed revenues and rates of tax sharing, the revenues of local governments are highly unpredictable and unstable. The transferable revenue refers to the funds that are allocated to local governments from the budgets of a higher level of the government in the form of grants, subsidies, and subventions. Subventions are paid mostly to provide for educational expenses. The main problem with the current system of revenue transfers is that it does not provide incentives for local governments to develop their own tax base. The calculation of grants and subsidies is based on previous year's local tax revenues: the higher they are, the more the transfers are reduced. The structure of the revenue base for rural radas, that participated in the case stud- ies, is provided in Table 9.6 These case studies illustrate a few important points: The non-tax revenues (regulated and transferable) are the major source of funds for local government (comprising more than one half to two thirds of total revenue). Most of these non-tax revenues come in the form of grants and subsidies. The share of off-budget funds is also rather substantial. These 144 Achieving Ukraine's Agricultural Potential T A B L E 9 . 6 Major Sources of Revenues for Village Radas (% of total rada budget revenues), 2001 Donetsk Odessa Rivni Sumy Average for (average) (average) (average) (average) all case studies 1. Taxes, total 33.4 41.4 46.1 45.6 41.6 1.1 Local taxes 0.2 6.2 5 3.7 3.8 1.2 National-level taxes 33.2 25.2 41.1 41.9 37.8 Including 1.2.1 Income tax 17.7 19.3 14.7 10.4 15.5 1.2.2 Fixed agricultural tax 9.6 7.8 9.8 14.7 10.5 1.2.3 Land tax 4.8 5 13.6 14.7 9.5 1.2.4 Other 1.1 3.1 3 2.1 2.3 2. Non-tax revenues*, total 66.6 58.6 53.9 54.4 58.4 2.1 Non-budgetary funds 4.1 18.5 19.6 27.3 17.4 2.2 Subsidies and grants 45.6 40.1 34.3 27.1 36.8 2.3 Subventions 16.9 -- -- -- 4.2 *Extra-budgetary funds, subsidies, grants, subventions Source: Case Studies. funds are created by the governments (beginning from rayon level) on ad hoc basis. National level taxes are the second largest source of revenues (25­40%) for local governments. Income tax provides about half of all revenues generated by na- tional level taxes. Fixed agricultural taxes that are paid by farm enterprises and land tax that is paid mostly by household plot owners raise approximately the same share of revenue for rural radas. Local taxes provide insignificant amount of total revenues for rural communities. Data in Table 9.6 show that the share of transfers in total revenue of rural radas is inversely related to the contribution of local taxes to the tax base. That may be an illustration of how higher transfers reduce incentives of local governments to collect taxes. A Strategy for Sustainable Public Service Maintenance in Rural Areas During the 1990s, the status of rural public infrastructure in Ukraine was deteriorat- ing. The capacity utilization and the amount of services that social institutions provide to rural residents declined considerably. The model of provision of social services and utilities that was adopted during central planning has become a constraint for develop- ment of the market-oriented agricultural sector in Ukraine. The solution to the social service problems in rural communities in Ukraine will not be easy, given the complexity of the issues and the need to coordinate several dimensions of economic reform including farm restructuring, administrative reform; public finance, intergovernmental fiscal relations, tax reform, and the promotion of economic growth. Rural Public Services Infrastructure 145 Policy Recommendations for Improving Rural Social Services Develop national level strategies for rural health care, rural education services, and rural public infrastructure maintenance, in order to rationalize the use of ex- isting infrastructure, personnel and available budget. The highly disbursed sys- tem of service provision that existed under the collective farm system, may no longer be appropriate. Increase national budgets for rural social services such as education and health care. With the sharp decline in collective farm financing for these services, it is now the responsibility of the national government to provide adequate budget allocations for these services. National budgets for these types of services, will clearly need to be increased from their current levels. Increases in direct central government payments for social services in rural areas could be funded from the reductions in central government subsidy payments to agricultural enterprises. Implement a program to strengthen the management function of village coun- cils. The national government may also consider a program of block grants to vil- lage councils for specific capital improvements such as sewage facilities, water supply or piped gas supply. Since local governments are taking responsibility for managing public infrastruc- ture, they should also be granted much wider authority over local taxes or receive greater allocations from the central and Oblast governments. The tax base of the local government could also be also increased in some cases by allowing them to tax business entities that operate on their territory. Granting more authority and flexibility in local taxation to local governments will allow them to attract outside investment into rural communities, thus promoting economic growth. Farm restructuring should result not only in transfer of social assets and utili- ties from farm enterprises to local governments but also in the creation of new businesses from the remnants of collective agricultural enterprises. For exam- ple, the former garage of a collective farm can become a private and commer- cial machine hire business. Several input supply, repair and construction businesses may also emerge. These businesses could form a base for vibrant and sustainable rural economy and provide local government with additional tax revenues that are needed to finance social expenditures. 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A N N E X 1 Commodity Specific Performance Indicators T A B L E A 1 . 1 Structure of Agricultural Production in Ukraine 1990 1995 1996 1997 1998 1999 2000 2001 2002 Total gross agricultural production [%] 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Crop production [%] 50.2 56.7 57.0 61.6 56.5 54.4 60.4 61.6 59.9 Grains [%] 21.2 20.9 17.4 25.3 21.1 20.6 19.5 28.3 27.3 Industrial crops [%] 7.3 7.7 6.8 5.8 5.8 6.5 6.7 5.5 6.0 potatoes, vegetables [%] 10.5 16.6 21.2 19.5 21.3 19.9 25.5 21.3 20.4 fruits, berries [%] 3.8 3.7 4.6 5.4 3.0 2.5 4.2 3.0 3.1 fodder crops [%] 6.6 5.9 5.2 5.5 4.7 4.0 3.6 3.3 2.9 other crop production [%] 0.7 1.9 1.9 0.1 0.6 0.8 0.9 0.2 0.2 Animal production [%] 49.8 43.3 43.0 38.4 43.5 45.6 39.6 38.4 40.1 Meat [%] 29.0 21.3 20.8 18.2 21.3 22.2 19.2 18.6 19.3 Milk [%] 15.4 16.9 17.0 15.1 16.7 17.4 15.0 14.5 15.0 Eggs [%] 3.7 3.3 3.4 3.3 3.7 4.1 3.8 3.8 4.4 Wool [%] 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 Other animal production [%] 1.6 1.7 1.7 1.7 1.8 1.9 1.5 1.5 1.3 Total gross agricultural production* [million hryvnias] 104,460 67,817 61,349 60,272 54,468 50,736 55,690 61,398 62,106 Crop production [million hryvnias] 52,400 38,423 34,998 37,141 30,749 27,579 33,632 37,805 37,190 Grains [million hryvnias] 22,184 14,189 10,669 15,238 11,473 10,434 10,856 17,388 16,925 Industrial crops [million hryvnias] 7,639 5,220 4,178 3,508 3,172 3,311 3,704 3,376 3,737 Potatoes, vegetables [million hryvnias] 10,978 11,245 12,976 11,764 11,621 10,113 14,205 13,084 12,685 Fruits, berries [million hryvnias] 4,008 2,514 2,818 3,273 1,613 1,269 2,366 1,812 1,944 Fodder crops [million hryvnias] 6,871 3,968 3,178 3,287 2,536 2,037 1,977 2,001 1,793 Other crop production [million hryvnias] 720 1,287 1,179 71 334 415 524 144 106 Animal production [million hryvnias] 52,060 29,394 26,351 23,131 23,719 23,157 22,058 23,593 24,916 Meat [million hryvnias] 30,285 14,469 12,747 10,983 11,619 11,265 10,718 11,446 12,017 Milk [million hryvnias] 16,075 11,430 10,432 9,101 9,089 8,826 8,356 8,885 9,345 Eggs [million hryvnias] 3,891 2,261 2,098 1,976 1,990 2,094 2,109 2,314 2,707 Wool [million hryvnias] 136 63 41 29 19 16 13 13 13 Other animal production [million hryvnias] 1,673 1,171 1,033 1,042 1,002 956 862 935 835 *Constant 2000 hryvnia values. Source: State Committee of Ukraine for Statistics. 153 T A B L E A 1 . 2 Structure of Gross Sales of Farm Enterprises (%) 1996 1997 1998 1999 2000 2001 2002 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Crop production 60.8 65.3 58.3 60.4 64.6 65.2 64.6 Grains 30.2 40.3 32.4 33.1 39.8 43.6 41.7 Sunflowerseed 6.5 5.6 8.1 11.6 10.0 8.0 11.0 Sugarbeet 19.2 15.1 13.5 11.3 11.1 10.6 8.8 Potatoes 0.8 0.6 0.6 0.5 0.4 0.3 0.3 Vegetables 2.9 2.4 3.0 3.4 2.6 2.2 2.3 Fruits & Berries 1.2 1.2 0.9 0.5 0.7 0.5 0.6 Animal production 39.2 34.7 41.7 39.6 35.4 34.8 35.4 Beef 12.8 12.6 14.0 13.1 12.6 10.7 9.6 Pork 4.9 4.2 5.3 5.0 4.1 4.4 5.1 Mutton 0.2 0.2 0.2 0.1 0.1 0.1 0.1 Poultry 1.7 1.3 2.0 1.9 1.9 3.2 5.3 Other meat products 0.4 0.5 0.4 0.4 0.3 0.3 0.3 Milk 13.7 11.3 14.8 14.1 12.0 11.4 9.7 Eggs 5.4 4.5 4.9 4.8 4.2 4.6 5.3 Wool 0.1 0.1 0.1 0.0 0.0 0.0 0.0 Source: State Committee of Ukraine for Statistics. T A B L E A 1 . 3 Volume and Structure of Grain Production in Ukraine (1000 metric tons) Cereals, Cereals, total Wheat Rye Barley Oats Maize Millet Rice Buckwheat Pulses other Volume of grain production 1990 51,009 30,374 1,260 9,169 1,303 4,737 338 118 420 3,266 26 1991 38,674 21,155 982 8,047 945 4,747 338 102 374 1,966 19 1992 38,537 19,507 1,158 10,106 1,246 2,851 226 92 351 2,986 15 1993 45,623 21,831 1,180 13,550 1,479 3,786 294 68 528 2,898 10 1994 35,497 13,857 942 14,509 1,385 1,539 158 80 342 2,636 51 1995 33,930 16,273 1,208 9,633 1,116 3,392 268 80 341 1,570 49 1996 24,571 13,547 1,094 5,726 731 1,837 115 82 301 1,122 17 1997 35,472 18,404 1,348 7,407 1,062 5,340 312 65 405 1,077 51 1998 26,471 14,937 1,140 5,870 741 2,301 248 72 341 772 51 1999 24,581 13,585 919 6,425 760 1,737 196 64 222 628 45 2000 24,459 10,197 968 6,872 881 3,848 426 90 481 652 44 2001 39,706 21,348 1,822 10,186 1,116 3,641 267 69 388 827 43 2002 38,804 20,556 1,509 10,364 943 4,180 112 75 209 810 46 Changes in volume of production (%) 1990­2001 -23.9 -32.3 19.8 13.0 -27.6 -11.8 -66.9 -36.2 -50.2 -75.2 80.4 2000­2001 62.3 109.4 88.2 48.2 26.6 -5.4 -37.5 -23.2 -19.4 26.9 -2.5 2001­2002 -2.3 -3.7 -17.2 1.8 -15.5 14.8 -58.0 8.9 -46.1 -2.1 7.4 Structure of grain production (%) 1990 100.0 59.5 2.5 18.0 2.6 9.3 0.7 0.2 0.8 6.4 0.0 1991 100.0 54.7 2.5 20.8 2.4 12.3 0.9 0.3 1.0 5.1 0.0 1992 100.0 50.6 3.0 26.2 3.2 7.4 0.6 0.2 0.9 7.7 0.0 1993 100.0 47.9 2.6 29.7 3.2 8.3 0.6 0.1 1.2 6.4 0.0 1994 100.0 39.0 2.7 40.9 3.9 4.3 0.4 0.2 1.0 7.4 0.1 1995 100.0 48.0 3.6 28.4 3.3 10.0 0.8 0.2 1.0 4.6 0.1 1996 100.0 55.1 4.5 23.3 3.0 7.5 0.5 0.3 1.2 4.6 0.1 1997 100.0 51.9 3.8 20.9 3.0 15.1 0.9 0.2 1.1 3.0 0.1 1998 100.0 56.4 4.3 22.2 2.8 8.7 0.9 0.3 1.3 2.9 0.2 1999 100.0 55.3 3.7 26.1 3.1 7.1 0.8 0.3 0.9 2.6 0.2 2000 100.0 41.7 4.0 28.1 3.6 15.7 1.7 0.4 2.0 2.7 0.2 2001 100.0 53.8 4.6 25.7 2.8 9.2 0.7 0.2 1.0 2.1 0.1 2002 100.0 53.0 3.9 26.7 2.4 10.8 0.3 0.2 0.5 2.1 0.1 Source: State Committee of Ukraine for Statistics. Commodity Specific Performance Indicators 155 T A B L E A 1 . 4 Structure of Grain Production, by Farm Type (1000 tons) %change in: 1990 1995 1997 1999 2000 2001 2002 1990/2002 2000/2001 2001/2002 Total production 51,009 33,930 35,472 24,581 24,459 39,706 38,804 -24 62 -2 Farm enterprises 49,564 31,182 32,104 21,621 19,964 31,660 29,485 -41 59 -7 Household plots 1,445 2,748 3,368 2,960 4,495 8,046 9,319 545 79 16 Share of household plots 2.83 8.10 9.49 12.04 18.38 20.26 24.02 748 10 19 Source: State Committee of Ukraine for Statistics. T A B L E A 1 . 5 Productivity Indicators for Grain %change in: 1991­95 1998 1999 2000 2001 2002 1991/2002 2000/2001 2001/2002 Grains Planted land. 1000 hectares 14,111 13,718 13,154 13,647 15,586 15,448 9.5 14.2 -0.9 Harvested land. 1000 hectares 13,964 12,756 12,780 12,587 14,649 14,242 2.0 16.4 -2.8 Yield ton/hectare harvested land 2.75 2.08 1.97 1.94 2.71 2.72 -1.1 39.4 0.6 Production. 1000 ton 38,452 26,471 24,581 24,459 39,706 38,804 0.9 62.3 -2.3 Source: State Committee of Ukraine for Statistics. T A B L E A 1 . 6 Financial Indicators of Grain Marketing %change in: 1990 1995 1996 1997 1998 1999 2000 2001 2002 1990/2002 2000/2001 2001/2002 Grains costs (hryvnia/ton) 82 4,402,963 102 128 151 179 269 266 262 218 -100 -198 Grains price (hryvnia/ton) 309 8,171,900 168 176 154 200 444 381 313 1 -100 -159 Grains profit (hryvnia/ton) 227 3,768,937 66 48 3 21 175 115 51 -78 -100 -251 Grains costs (US$/ton) 130.8 29.9 55.9 68.8 61.8 43.3 49.5 49.5 49.2 -62 -309 -652 Grains price (US$/ton) 490.5 55.5 92.0 94.6 63.0 48.5 81.6 71.0 58.7 -88 -259 -381 Grains profit (US$/ton) 359.7 25.6 36.1 25.8 1.2 5.2 32.1 21.4 9.5 -97 -481 -1430 Grains profit (US$/hectare) 1255.4 62.2 70.8 63.2 2.4 10.2 62.2 58.1 25.9 -98 -258 -464 Profitability rate (%) 275.1 85.6 64.6 37.5 1.9 12.0 64.8 43.3 19.3 -93 -209 -423 Source: State Committee of Ukraine for Statistics. 156 Achieving Ukraine's Agricultural Potential T A B L E A 1 . 7 Grain Produced and Marketed, by Type of Marketing Agent (1000 tons) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Production 38,674 38,537 45,623 35,497 33,930 24,571 35,472 26,471 24,581 24,459 39,706 38,804 Marketed 17,077 17,014 20,372 15,608 13,109 12,606 17,090 14,548 13,721 10,726 16,967 18,979 % marketed 44.2 44.1 44.7 44.0 38.6 51.3 48.2 55.0 55.8 43.9 42.7 48.9 Structure of sales, 1000 tons Procurement agency 11,170 10,904 13,686 9,847 4,911 4,511 4,389 2,189 1,466 428 368 450 Farmers market, 1,648 1,483 1,799 1,496 2,509 2,522 3,412 3,364 3,465 3,735 3,005 3,065 retail trade Payment to shareholders 0 0 0 0 0 0 0 0 0 1,517 2,168 2,377 Population (payments in 4,037 4,527 4,767 3,935 3,973 3,259 4,361 4,127 4,143 2,214 2,734 2,163 kind, public catering) Other 222 101 121 330 1,716 2,314 4,927 4,868 4,647 4,349 10,861 13,302 Barter 67 100 121 330 1,680 2,288 4,915 4,849 4,624 2,730 2,013 1,282 Structure of sales, % Procurement agency 65.4 64.1 67.2 63.1 37.5 35.8 25.7 15.0 10.7 4.0 2.2 2.4 Farmers market, 9.6 8.7 8.8 9.6 19.1 20.0 20.0 23.1 25.3 34.8 17.7 16.1 retail trade Payment to shareholders 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 14.1 12.8 12.5 Population (payments in 23.6 26.6 23.4 25.2 30.3 25.9 25.5 28.4 30.2 20.6 16.1 11.4 kind, public catering) Other 1.3 0.6 0.6 2.1 13.1 18.4 28.8 33.5 33.9 40.5 64.0 70.1 Barter 0.4 0.6 0.6 2.1 12.8 18.1 28.8 33.3 33.7 25.4 11.9 6.8 Source: State Committee of Ukraine for Statistics. Commodity Specific Performance Indicators 157 T A B L E A 1 . 8 Grain Balance (million tons) %change in: 1999/ 2000/ 2001/ 1994 1995 1996 1997 1998 1999 2000 2001 2002 2000 2001 2002 Opening Stocks 24.6 22.0 21.3 15.0 20.6 16.0 11.3 12.7 19.8 -29.2 11.7 56.0 Production 35.5 33.9 24.6 35.5 26.5 24.6 24.5 39.7 38.8 -0.5 62.3 -2.3 Imports 0.2 0.2 0.2 0.1 0.1 0.1 1.0 0.4 0.2 963.2 -56.5 -62.2 Total Supply 60.3 56.2 46.0 50.6 47.2 40.7 36.8 52.8 58.7 -9.6 43.5 11.2 Seeds 0.5 4.6 4.1 4.0 3.8 3.6 3.6 4.1 3.9 0.4 12.8 -4.6 Food use 9.3 8.9 8.4 8.6 8.5 7.6 7.7 8.4 8.4 2.1 8.4 0.4 Feed use 22.1 18.5 14.9 13.7 13.7 11.3 11.1 14.0 15.7 -1.7 26.4 12.6 Food Processing 0.6 0.9 0.8 1.1 0.2 0.1 0.1 0.4 0.9 4.2 250.0 144.9 Total Domestic Demand 32.5 32.9 28.3 27.3 26.1 22.5 22.5 26.8 28.9 -0.1 19.1 7.9 Exports 0.1 0.8 2.1 1.8 4.2 6.4 1.3 5.6 12.3 -79.2 320.8 119.0 Losses 1.4 1.2 0.6 0.9 0.8 0.5 0.3 0.7 0.6 -31.3 116.8 -17.9 Total Demand 34.0 34.9 31.0 30.0 31.1 29.4 24.1 33.1 41.7 -17.8 36.9 26.2 Closing Stocks 22.0 21.3 15.0 20.6 16.1 11.3 12.7 19.8 17.0 11.7 56.0 -13.9 Changes in stocks -2.6 -0.8 -6.2 5.6 -4.5 -4.7 1.3 7.1 -2.8 Structure of grain balance (%) Opening Stocks 40.8 39.2 46.2 29.7 43.7 39.4 30.8 24.0 33.6 Production 58.9 60.4 53.4 70.1 56.1 60.4 66.5 75.2 66.1 Imports 0.3 0.4 0.4 0.2 0.2 0.2 2.7 0.8 0.3 Total Supply 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Seeds 0.8 8.2 8.9 7.9 8.1 8.8 9.8 7.7 6.6 Food use 15.5 15.8 18.3 16.9 17.9 18.7 21.1 15.9 14.4 Feed use 36.7 33.0 32.4 27.0 28.9 27.6 30.0 26.5 26.8 Food Processing 0.9 1.6 1.8 2.2 0.4 0.2 0.3 0.7 1.5 Total Domestic Demand 53.9 58.5 61.4 53.9 55.4 55.3 61.1 50.7 49.2 Exports 0.2 1.4 4.6 3.5 8.9 15.7 3.6 10.6 20.9 Losses 2.3 2.2 1.3 1.8 1.7 1.1 0.8 1.3 0.9 Total Demand 56.4 62.1 67.4 59.3 65.9 72.2 65.6 62.6 71.0 Closing Stocks 36.6 37.9 32.6 40.7 34.1 27.8 34.4 37.4 29.0 Changes in stocks -4.2 -1.3 -13.6 11.1 -9.6 -11.5 3.6 13.4 -4.7 Source: State Committee of Ukraine for Statistics. T A B L E A 1 . 9 Major Indicators of Sunflower Sector %change in: 1990/ 1999/ 2000/ 1990 1996 1997 1998 1999 2000 2001 2002 2001 2000 2001 Planted acreage (1000 hectares) 1,601 2,107 2,065 2,531 2,889 2,943 2,502 2,834 Sunflower production (1000 tons) 2,571 2,123 2,308 2,266 2,794 3,457 2,251 3,271 Sunflower export (1000 tons) 105 861 1074 908 433 834 584 68 Export as % of sunflower output 4 41 47 40 15 24 26 2 Sunflower oil production (1000 tons) 1,070 705 510 511 577 973 935 980 Sunflower oil export (1000 tons) 488 271 186 198 174 582 473 566 Export as % of sunflower oil production 47 39 37 40 32 62 54 58 Source: State Committee of Ukraine for Statistics. 158 Achieving Ukraine's Agricultural Potential T A B L E A 1 . 1 0 Profitability of Sunflower Production %change in: 1999/ 2000/ 2001/ 1990 1996 1997 1998 1999 2000 2001 2002 2000 2001 2002 Sunflower costs (hryvnia/ton) 116 172 221 263 329 343 464 474 5 35 2 Sunflower price (hryvnia/ton) 389 265 264 321 508 523 783 844 3 50 8 Sunflower profit (hryvnia/ton) 273 93 43 58 179 179 319 369 0 78 16 Sunflower price (US$/ton) 671 145 142 131 123 96 146 158 -22 52 9 Sunflower profit (US$/hectare) 745 53 27 22 43 40 56 83 -7 39 50 Profitability rate (%) 237 54 19 22 55 52 69 78 Source: State Committee of Ukraine for Statistics. T A B L E A 1 . 1 1 Productivity of Sugarbeet Production %change in: 1999/ 2000/ 2001/ 1991­95 1998 1999 2000 2001 2002 2000 2001 2002 Sugarbeet Planted land, 1000 hectares 1,509 1,017 1,022 856 970 897 -16 13 -8 Harvested land, 1000 hectares 1,499 893 900 747 853 763 -17 14 -11 Yield ton/hectare harvested land 21 17 16 18 18 19 13 3 4 Production, 1000 ton 31,291 15,523 14,064 13,199 15,575 14,452 -6 18 -7 Source: State Committee of Ukraine for Statistics. T A B L E A 1 . 1 2 Profitability of Sugarbeet Production %change in: 1991 1998 1999 2000 2001 2002 2000/2002 2000/2001 2001/2002 Sugarbeet costs (hryvnia/ton) 67 78 93 115 137 140 22 20 2 Sugarbeet price (hryvnia/ton) 107 68 79 122 139 128 5 14 -8 Sugarbeet profits(hryvnia/ton) 40 -9 -14 7 2 -12 -273 -71 -686 Sugarbeet costs (US$/ton) 115 32 23 21 26 26 25 21 3 Sugarbeet price (US$/ton) 184 28 19 22 26 24 8 16 -7 Sugarbeet profit (US$/ton) 69 -4 -3 1 0 -2 -276 -70 -691 Sugarbeet profit (US$/hectare) 1529 -66 -52 23 7 -43 -289 -69 -713 Profitability rate 59.9 -12 -14.8 6.1 1.5 -8.6 Source: Authors' own calculations based on State Committee of Ukraine for Statistics data. Commodity Specific Performance Indicators 159 T A B L E A 1 . 1 3 Sugar Balance, 1000 tons 2000/2001 2001/2002 2002/2003 Total supply 2025 2185 2175 Opening stocks 20 57 125 Production, total 1780 1830 1770 Production, from sugar beets 1552 1650 1430 Production, from imported raw sugar 228 180 340 Refined sugar imports 125 48 80 Illegal sugar imports 100 250 200 Closing stocks 57 125 55 Total demand 1968 2060 2120 Human consumption 1540 1580 1560 Non-food use 400 400 400 Exports 8 80 140 Losses 20 20 20 Source: State Committee of Ukraine for Statistics; Authors' calculations. T A B L E A 1 . 1 4 Major Indicators of Ukraine's Meat Sector %change in: Production (1000 ton) 1992 1997 1998 1999 2000 2001 2002 1992/2002 2000/2001 2001/2002 Beef and Veal 2,750 1,623 1,361 1,357 1,316 1,103 1,191 -57 -16 8 Mutton and Lamb 80 56 46 42 39 35 37 -53 -11 8 Pork 1,582 995 930 922 948 820 835 -47 -13 2 Poultry Meat 674 255 270 279 263 326 401 -41 24 23 Other Meat 62 48 46 47 42 49 53 -14 16 8 Meat, Total 5,148 2,976 2,653 2,647 2,608 2,333 2,518 -51 -11 8 Production Structure (%) Beef and Veal 53 55 51 51 50 47 47 Mutton and Lamb 2 2 2 2 1 1 1 Pork 31 33 35 35 36 35 33 Poultry Meat 13 9 10 11 10 14 16 Other Meat 1 2 2 2 2 2 2 Meat, Total 100 100 100 100 100 100 100 Animal numbers (1000 Head), at the beginning of the year %change in: 1992 1997 1998 1999 2000 2001 2002 2003 2001/2002 2002/2003 Cattle 23,728 15,313 12,759 11,722 10,627 9,424 9,421 9,108 0 -3 Sheep and goats 7,829 3,047 2,362 2,026 1,885 1,875 1,965 1,984 5 1 Pigs 17,839 11,236 9,479 10,083 10,073 7,652 8,370 9,204 9 10 Poultry 243,121 129,449 123,340 129,474 126,080 123,722 136,811 147,445 11 8 Source: State Committee of Ukraine for Statistics. 160 Achieving Ukraine's Agricultural Potential T A B L E A 1 . 1 5 Recent Changes in Animal Numbers (1000) Share of Farm Household household Daily All farms enterprises farms farms gain (gr) Cattle 1999 10,627 6,706 3,921 37 258 2000 9,424 5,037 4,386 47 255 2001 9,421 4,663 4,758 51 318 2002 9,109 4,194 4,915 54 322 2002 % of 2001 97 90 103 Cows 1999 5,431 2,476 2,955 54 n/a 2000 4,958 1,851 3,107 63 n/a 2001 4,918 1,675 3,243 66 n/a 2002 4,716 1,402 3,314 70 n/a 2002 % of 2001 96 84 102 Hogs 1999 10,073 4,113 5,960 59 127 2000 7,652 2,414 5,238 68 120 2001 8,370 2,907 5,463 65 173 2002 9,204 3,391 5,813 63 198 2002 % of 2001 110 117 106 Sheep and goats 1999 1,885 556 1,328 70 n/a 2000 1,875 413 1,462 78 n/a 2001 1,965 390 1,575 80 24 2002 1,984 362 1,622 82 25 2002 % of 2001 101 93 103 Poultry 1999 126,080 27,841 98,239 78 n/a 2000 123,722 25,353 98,369 80 n/a 2001 136,811 35,163 101,648 74 n/a 2002 147,445 41,705 105,741 72 n/a 2002 % of 2001 108 119 104 Source: State Committee of Ukraine for Statistics. Commodity Specific Performance Indicators 161 T A B L E A 1 . 1 6 Meat Marketing and Profitability Indicators %change in: 1999 2000 2001 2002 2000/2001 2001/2002 Total meat marketed (1000 tons of live weight) 2647 2608 2333 2517 -11 8 Household plots 1861 1889 1778 1835 -6 3 Farm enterprises 785 719 555 682 -23 23 Share of household plots (%) 70 72 76 73 5 -4 Average prices paid for live cattle, hogs and poultry, (hryvnia/ton) 1767 2358 4176 3644 77 -13 Profitability (%) Animal production, total -47 -34 -9 -20 Including: cattle -58 -42 -21 -41 hogs -51 -44 -7 -17 sheep -57 -46 -25 -27 poultry -46 -33 -2 -1 eggs -1 11 25 15 wool -87 -76 -70 -79 Source: State Committee of Ukraine for Statistics. T A B L E A 1 . 1 7 Meat Marketing Indicators, by Type of Marketing Agent, 2002 Cattle Hogs Poultry Sales Sales Sales volume Price volume Price volume Price Hryvnias/ Hryvnias/ Hryvnias/ ton ton ton of live of live of live 1000 tons % weight) % 1000 tons % weight) % 1000 tons % weight) % 469 100 2918 100 143 100 5119 100 168 100 4493 100 Procurement agency 163 35 3310 113 51 36 4981 97 3 1 4081 91 Cooperative 5 1 2578 88 1 0 3786 74 0 0 5857 130 Population (payments in kind, public catering) 81 17 2939 101 30 21 5798 113 5 3 5010 111 Payment to shareholders 5 1 3786 130 2 1 7266 142 0 0 5336 119 Farmers market, retail trade 96 21 2459 84 23 16 4839 95 54 32 4351 97 Commodity exchange 0 0 4508 154 0 0 0 0 0 0 0 0 Other 120 26 2723 93 36 25 4836 94 107 64 4549 101 Barter 6 1 2770 95 2 1 5034 98 1 1 4821 107 Source: State Committee of Ukraine for Statistics. T A B L E A 1 . 1 8 Meat Balance (1000 tons) %change in: 1999 2000 2001 2002 2000/2001 2001/2002 Total supply 2,027 1,905 1,725 1840 -9 7 Opening stocks 231 204 122 107 -40 -12 Production 1,695 1,663 1,517 1648 -9 9 Imports 101 38 86 85 126 -1 Total use 1823 1783 1618 1723 -9 6 Domestic use 1661 1620 1520 1577 -6 4 Human consumption 1,646 1,611 1,513 1570 -6 4 Non-food use 10 8 7 7 -13 0 Losses 5 1 0 0 0 0 Export 162 163 98 146 -40 49 Closing stocks 204 122 107 117 -12 9 Structure of meat balance (%) Total supply 100 100 100 100 Opening stocks 11 11 7 6 Production 84 87 88 90 Imports 5 2 5 5 Total use 90 94 94 94 Domestic use 82 85 88 86 Human consumption 81 85 88 85 Non-food use 0 0 0 0 Losses 0 0 0 0 Export 8 9 6 8 Closing stocks 10 6 6 6 Source: State Committee of Ukraine for Statistics. T A B L E A 1 . 1 9 Milk Sector: Production and Profitability Trends %change in: 1999 2000 2001 2002 1999/2000 2000/2001 2001/2002 Milk cow numbers 5,431 4,958 4,919 4,715 -9 -1 -4 Farm enterprises 2,476 1,851 1,675 1,402 -25 -9 -16 Household plots 2,955 3,107 3,244 3,314 5 4 2 Share of household plots 54 63 66 70 Milk yield, kg per cow per year 2,358 2,359 2,151 2,349 0 -9 9 Milk production, total 13,362 12,658 13,444 14,142 -5 6 5 Farm enterprises 4,719 3,669 3,637 3,468 -22 -1 -5 Household plots 8,643 8,989 9,808 10,674 4 9 9 Share of household plots 65 71 73 75 10 3 3 Milk marketing, farm enterprises, 1000 tons 3,241 2,684 2,802 2,556 -17 4 -9 Milk marketed (%) 69 73 77 74 7 5 -4 Milk price, hryvnia/ton 360 536 604 541 49 13 -10 Milk production costs, hryvnia/ton 568 569 611 620 0 7 1 Milk profits, hryvnia/ton -208 -32 -7 -79 Milk price, US$/ton 87 99 112 102 13 14 -10 Milk production costs, US$/ton 138 105 114 116 -24 9 2 Milk profits, US$/ton -50 -6 -1 -15 Profitability, % -37 -6 -1 -14 Source: State Committee of Ukraine for Statistics. Commodity Specific Performance Indicators 163 T A B L E A 1 . 2 0 Milk Marketing Indicators by Type of Marketing Agent %change in: 2001/ 2001/ 2000 2001 2002 2002 2002 Sales Sales Sales Sales volume Price volume Price volume Price volume Price 1000 Hryvnias/ 1000 Hryvnias/ 1000 Hryvnias/ tons % ton % tons % ton % tons % ton % Milk marketing, total, 1000 tons 2684 100 536 100 2,802 100 604 100 2,556 100 541 100 91 90 Procurement agency 1778 66 548 102 2010 72 616 102 1887 74 555 103 94 90 Cooperative 1 0 606 113 1 0 683 113 1 0 479 88 208 71 Population (payments in kind, public catering) 207 8 487 91 143 5 543 90 108 4 490 91 75 90 Farmers market, retail trade 569 21 528 98 641 23 578 96 554 22 504 93 96 87 Barter 128 5 488 91 55 2 536 89 28 1 473 87 51 88 Payment to shareholders 0 0 0 0 6 0 557 92 6 0 545 101 48 98 Source: State Committee of Ukraine for Statistics. T A B L E A 1 . 2 1 Production of Milk Products Change in 2000 2001 2002 2001/2002 Butter, 1000 tons 135 156 131 83 Cheese, 1000 tons 68 105 129 123 Fluid milk products, 1000 tons 699 1009 1178 115 Dry milk, 1000 tons 11 23 n/a n/a Ice cream, 1000 tons 89 91 n/a n/a Canned milk products, million cans 122 158 n/a n/a Source: State Committee of Ukraine for Statistics. 164 Achieving Ukraine's Agricultural Potential T A B L E A 1 . 2 2 Milk Balance (thousand tons) Change in Change in 2000 2001 2002 2000/2001 2001/2002 Total supply 13,722 14,164 14,483 442 319 Opening stocks 1,014 620 282 -394 -338 Production 12,658 13,444 14,142 786 698 Imports 50 100 59 50 -41 Total use 13,102 13,882 13,886 780 4 Domestic demand 12,002 11,982 12,961 -20 979 Human consumption 9,789 9,987 10,859 198 872 Non-food use 2,203 1,990 2,092 -213 102 Losses 10 5 10 -5 5 Exports 1,100 1,900 925 800 -975 Closing stocks 620 282 597 -338 315 Source: State Committee of Ukraine for Statistics. T A B L E A 1 . 2 3 Structure of Milk Balance (%) Total supply 100 100 100 Opening stocks 7 4 2 Production 92 95 98 Imports 0 1 0 Total use 95 98 96 Human consumption 87 85 89 Domestic demand 71 71 75 Non-food use 16 14 14 Losses 0 0 0 Exports 8 13 6 Closing stocks 5 2 4 Source: State Committee of Ukraine for Statistics. A N N E X 2 Changes in the Tax System for Agricultural Enterprises, 1997­2001 T A B L E A 2 . 1 The System of Taxes for Agricultural Enterprises 1997 1998 1999 2000 2001 Number of farm enterprises, total 12152 12288 12323 13246 13616 1 000 hryvnia, nominal values Value of sales 8821742 8002907 9500066 16836813 23843651 Profit -3324399 -3975124 -3310092 1948947 1210390 Gross taxes, total 3105409 3064519 1458622 798302 1886547 of which: Profit tax 10204 8564 3862 269126 42010 Excise tax 14352 18643 16571 4220 19294 Value-added tax* 897938 917235 428919 245127 1353000 Chernobyl tax 326471 216792 0 0 0 Fixed tax: assessed 0 0 474500 338800 421700 paid 0 0 173100 223900 341600 Natural resources tax 201240 241439 447164 0 0 Social security tax 127109 115008 929 0 0 Pension fund 1006423 924509 6058 0 0 Employment fund 28028 54370 1363 0 0 Road tax 59528 76869 2855 0 0 Work safety fund 8448 0 0 0 0 Innovations fund 32957 68088 2940 0 0 Nature protection fund 0 0 49 0 0 Other social payments 0 0 0 55639 130293 Other taxes 392711 423002 374812 290 350 Tax privileges, total 57183 207000 354000 524000 1216000 of which: Profit tax exemption 57183 0 0 0 0 VAT tax exemption 0 0 118000 117000 582000 VAT tax refund from food processors 0 207000 236000 407000 634000 Net taxes (Gross taxes--Tax privileges) 3048226 2857519 1104622 274302 670547 Net taxes as % of sales value 34.6 35.7 11.6 1.6 2.8 Net taxes as % of profit -91.7 -71.9 -33.4 14.1 55.4 Tax privileges as % of gross taxes 1.8 6.8 24.3 65.6 64.5 *VAT paid for products and services not eligible for VAT preference. Source: Ministry of Agricultural Policy-Annual Accounting Report of Agricultural Enterprises, 1998­2001. 165 166 Achieving Ukraine's Agricultural Potential T A B L E A 2 . 2 The Structure of Taxes and Tax Privileges of Agricultural Enterprises (in %) 1997 1998 1999 2000 2001 Gross taxes, total 100.0 100.0 100.0 100.0 100.0 of which: Profit tax 0.3 0.3 0.3 33.7 2.2 Excise tax 0.5 0.6 1.1 0.5 1.0 Value-added tax 28.9 29.9 29.4 30.7 71.7 Chernobyl tax 10.5 7.1 0.0 0.0 0.0 Fixed tax: assessed 0.0 0.0 32.5 42.4 22.4 paid 0.0 0.0 11.9 28.0 18.1 Natural resources tax 6.5 7.9 30.7 0.0 0.0 Social security tax 4.1 3.8 0.1 0.0 0.0 Pension fund 32.4 30.2 0.4 0.0 0.0 Employment fund 0.9 1.8 0.1 0.0 0.0 Road tax 1.9 2.5 0.2 0.0 0.0 Work safety fund 0.3 0.0 0.0 0.0 0.0 Innovations fund 1.1 2.2 0.2 0.0 0.0 Nature protection fund 0.0 0.0 0.0 0.0 0.0 Other social payments 0.0 0.0 0.0 7.0 6.9 Other taxes 12.6 13.8 25.7 0.0 0.0 Tax privileges, total 100 100 100 100 100 Profit tax exemption 100 0 0 0 0 VAT exemption 0 0 33.3 22.3 47.9 VAT refund from food processors 0 100 66.7 77.7 52.1 Source: Ministry of Agricultural Policy-Annual Accounting Report of Agricultural Enterprises, 1998­2001. A N N E X 3 Definitions of OECD Indicators of Support to Agriculture P roducer Support Estimate (PSE): An indicator of the annual monetary value of gross transfers from consumers and taxpayers to support agricultural pro- ducers, measured at farmgate level, arising from policy measures, regardless of their nature, objectives or impacts on farm production or income. The PSE measures support arising from policies targeted to agriculture relative to a situation without such policies, i.e. when producers are subject only to general policies (including eco- nomic, social, environmental and tax policies) of the country. The PSE is a gross no- tion implying that any costs associated with those policies and incurred by individual producers are not deducted. It is also a nominal assistance notion meaning that in- creased costs associated with import duties on inputs are not deducted. But it is an indicator net of producer contributions to help finance the policy measure (e.g. pro- ducer levies) providing a given transfer to producers. The PSE includes implicit and explicit transfers. The %PSE is the ratio of the PSE to the value of total gross farm receipts, measured by the value of total production (at farm gate prices), plus bud- getary support. Producer Nominal Assistance Coefficient (NACp): An indicator of the nominal rate of assistance to producers measuring the ratio between the value of gross farm re- ceipts including support and gross farm receipts valued at world market prices without support. Producer Nominal Protection Coefficient (NPCp): An indicator of the nominal rate of protection for producers measuring the ratio between the average price received by producers (at farmgate), including payments per ton of current output, and the bor- der price (measured at farmgate level). Consumer Support Estimate (CSE): An indicator of the annual monetary value of gross transfers to (from) consumers of agricultural commodities, measured at the farm gate (first consumer) level, arising from policy measures which support agricul- ture, regardless of their nature, objectives or impact on consumption of farm products. The CSE includes explicit and implicit transfers from consumers associated with: mar- ket price support on domestically produced consumption (transfers to producers from 167 168 Achieving Ukraine's Agricultural Potential consumers); transfers to the budget and/or importers on the share of consumption that is imported (other transfers from consumers). It is net of any payment to consumers to compensate them for their contribution to market price support of a specific com- modity (consumer subsidy from taxpayers); and the producer contribution (as con- sumers of domestically produced crops) to the market price support on crops used in animal feed (excess feed cost). When negative, transfers from consumers measure the implicit tax on consumption associated with policies to the agricultural sector. Although consumption expenditure is increased/reduced by the amount of the implicit tax/subsidy, this indicator is not in itself an estimate of the impacts on consumption expenditure. The %CSE is the ratio of the CSE to the total value of consumption ex- penditure on commodities domestically produced, measured by the value of total con- sumption (at farm gate prices) minus budgetary support to consumers (consumer subsidies). Consumer Nominal Assistance Coefficient (NACc): an indicator of the nomi- nal rate of assistance to consumers measuring the ratio between the value of consumption expenditure on agricultural commodities domestically produced in- cluding support to producers and that valued at world market prices without support to consumers. Consumer Nominal Protection Coefficient (NPCc): an indicator of the nominal rate of protection for consumers measuring the ratio between the average price paid by consumers (at farmgate) and the border price (measured at farm gate level). General Services Support Estimate (GSSE): An indicator of the annual mone- tary value of gross transfers to services provided collectively to agriculture and arising from policy measures which support agriculture, regardless of their nature, objectives and impacts on farm production, income, or consumption of farm products. It in- cludes taxpayer transfers to: improve agricultural production (research and develop- ment); agricultural training and education (agricultural schools); control of quality and safety of food, agricultural inputs, and the environment (inspection services); improv- ing off-farm collective infrastructures, including downstream and upstream industry (infrastructures); assist marketing and promotion (marketing and promotion); meet the costs of depreciation and disposal of public storage of agricultural products (pub- lic stockholding); and other general services that cannot be disaggregated and allocated to the above categories due, for example, to a lack of information (miscellaneous). Un- like the PSE and CSE transfers, these transfers are not received by producers or con- sumers individually and do not affect farm receipts (revenue) or consumption expenditure by their amount, although they may affect production and consumption of agricultural commodities. The %GSSE is the ratio of the GSSE to the Total Sup- port Estimate. Total Support Estimate (TSE): An indicator of the annual monetary value of all gross transfers from taxpayers and consumers arising from policy measures which support agriculture, net of the associated budgetary receipts, regardless of their ob- jectives and impact on farm production and income, or consumption of farm prod- ucts. The TSE is the sum of the explicit and implicit gross transfers from consumers of agricultural commodities to agricultural producers net of producer financial con- Definitions of OECD Indicators of Support to Agriculture 169 tributions (in MPS and CSE ); the gross transfers from taxpayers to agricultural pro- ducers (in PSE ); the gross transfers from taxpayers to general services provided to agriculture (GSSE ); and the gross transfers from taxpayers to consumers of agricul- tural commodities (in CSE ). As the transfers from consumers to producers are in- cluded in the MPS, the TSE is also the sum of the PSE, the GSSE, and the transfers from taxpayers to consumers (in CSE ). The TSE measures the overall transfers asso- ciated with agricultural support, financed by consumers (transfers from consumers) and taxpayers (transfers from taxpayers) net of import receipts (budget revenues). The %TSE is the ratio of the TSE to the GDP. A N N E X 4 Agricultural Policies and Support for Individual Commodities T his Annex consists of ten sections covering the main agricultural commodities in Ukraine. Each section presents a brief overview of domestic support poli- cies, border measures and trends in support (as measured by the OECD Pro- ducer Support Estimate) for a given commodity. Grains Domestic Measures Under the planned system, all marketable grain was delivered to state procurement agencies at fixed procurement prices. Collective farms, whose deliveries exceeded their average annual levels during the preceding 5 years, in addition to procurement price were eligible for supplementary payments. Unprofitable and low-profitable farms re- ceived special supplementary per ton payments. After the start of economic reform, indicative procurement prices were introduced for all commodities procured by the state, including grain. During 1992, these prices were indexed throughout the year based on the price index for main agricultural inputs. Grain producers also received a compensation for fuel and electricity, which represented a fixed amount paid for each ton delivered to the state procurement system. Starting from 1993, this assistance was discontinued. Traditional (cash-based) grain procurements and announcing procurement prices continued until 1997. Although the share of state procurements in the total volume of marketed grain has been constantly declining (from 38% to 10% between 1992 and 1997), the announced procurement prices served as a principal reference for grain mar- ket agents during this period. In 1994­1997, cash advancing was carried out as part of the grain procurement mechanism. Grain producers who concluded delivery contracts with procurement agencies were eligible for a 50% prepayment for contracted grain, with the final settlement made upon delivery. A part of the credit advanced under this mechanism remained not repaid. For example, in 1996 this debt was estimated at 56 million hryvnia (US$29 million). 171 172 Achieving Ukraine's Agricultural Potential In 1998 the government stopped cash-based grain purchases and switched entirely to commodity credit.81 Since then and until 2000, it was the principal mechanism through which the government implemented grain procurement and thereby, indirectly regulated grain prices.82 Commodity credit created additional farm debt. Inputs were supplied with little respect to the farms' repayment capacity with a large part of bene- ficiaries unable to repay the advances in full. This debt had been accumulating through- out the duration of this programme, and as such represented an implicit subsidy to grain producers. In 2000, the government made a decision to discontinue commodity cred- its and to restructure the associated overdue debt. Thus, 129.0 million hryvnia (US$24.0 million) were written off to the farms who received commodity advances in 1994­1999, and another 235.8 million hryvnia (US$43.9 million) were rescheduled until 2008. In 2001 a new programme, officially called grain pledge purchases, was introduced, which emulated the US loan rate programme for grains.83 As the funds available for the implementation of the programme were considerably limited, the amounts of pledged grain were very small, equaling only about 0.1 million tons both in 2001 and 2002. In June 2002, a Law "On Grain and Grain Market in Ukraine" (the Grain Law) was adopted, setting out the new policies in the grain sector. Among the main measures in- scribed in the Law are the grain pledge purchases and "grain purchases for intervention purposes." It is not stated, however, to what extent and within what time frame the Ukrainian government is envisaging the implementation of the above mentioned provisions. Trade Measures84 Between 1993 and 1995, grain and flour exports were subjected to quotas and licens- ing. Export quotas were fixed at relatively high levels, but allocated only to the Min- istry of Agriculture and the State Committee on Grain Products for supplies under the international agreements and government contracts. Private traders had no access to the quota, as no quota shares were destined for free tender. As a result, the quota re- mained substantially under-filled, but did not allow for entry of additional (private) exporters. Such an administration mechanism, although providing for relatively high quota volumes, in fact substantially limited grain exports. During 1993, a 30% duty on exported grain was imposed, but was lifted in 1994. Between September 1994 and April 1996 the government set indicative export prices for grains. A 10% MFN duty on imports of wheat, barley and maize was effective in 1993. This rate was maintained until 1996, when a combined import tariff was introduced for grains, with ad valorem rates varying between 20% (barley), 15% (wheat) to 10% (maize) and specific rates from ECU 20 per ton (barley), 40 (wheat) to 10 (maize). The 1997 Law of Ukraine "On State Customs Tariff" increased the ad valorem component to 30% for all three grains and fixed the specific rates between ECU 40 (wheat) and 20 (barley and maize) per ton. Until the end of 1998, mostly specific rates were effectively 81It should be noted that the practice of commodity credit already existed before, but since 1998 it had become the principal mechanism of state procurements. 82For more detail on state commodity credit see "Price and Income Support" in Chapter 3. 83For more detail on grain pledge purchases see the section on "Price and Income Support" in Chapter 3. 84For a detailed overview of general trade measures see Chapter 4. Agricultural Policies and Support for Individual Commodities 173 applicable. Starting from December 1998, ad valorem tariffs were abolished for wheat and barley imports with only specific duties imposed. The import tariff for maize had remained as it was stipulated by the 1997 Law, i.e., 30% but not less than 620 per ton. Seeds of hard wheat and hybrid maize are imported in Ukraine duty free. Trends in Producer During the pre-reform period (1986­1991), the average %PSE for grains varied from Support85 69% for wheat, 85% for maize and 79% for other grains (rye, barley and oats). In ad- dition to general factors, explaining the overall high producer support before the tran- sition (see Chapter 5), a substantial increase in procurement prices for grains in 1990 contributed to high average support estimates during this period. The beginning of market reform in 1992 was marked by a considerable deprecia- tion of the exchange rate, translating in turn into an abrupt fall in the level of domestic prices relative to world levels. This fundamental macroeconomic shift was the single most important factor causing the %PSEs to become negative, and implying a strong taxation of grain producers at the very beginning of price liberalization. This shift from positive to negative support was particularly pronounced for wheat, whose %PSE hit minus 147% in 1992 (Figure A4.1). The %PSEs recovered consider- ably in 1993, but was still negative, while in 1994 it reached a positive level of 49%. Apart from the general causes driving the recovery of producer support during this pe- riod, which are discussed in Chapter 5, there were also product-specific factors F I G U R E A 4 . 1 Percentage PSEs, Producer and Reference Prices for Wheat 1986­2001 PSE MPS Producer price Reference price 100 % 400 50 % 200 0 % 0 % $/Ton MPS, -50 % -200 US and PSE Price, -100 % -400 -150 % -600 -200 % -800 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: OECD 85Detailed support estimates by commodities are contained in the CD "Evaluation of Support to Ukrainian Agri- culture: Methodology and Detailed Tables" attached to this Report, with the summary data presented in Tables 1, 2, 3 and 6. 174 Achieving Ukraine's Agricultural Potential explaining the increase in %PSE for wheat. Thus, during 1991­1994 Ukraine experi- enced a substantial tightening of its grain supply, becoming a net grain importer. This stimulated domestic prices, at the same time the switch to net importing meant that the domestic market had become effectively protected by import tariffs. In 1995 the grain surplus re-emerged pushing domestic prices below world levels. Together with other general factors, as outlined in Chapter 5, this led the %PSE to fall into negative area again. In the following years the level of support for wheat was quite volatile, reflecting the shifts in relative levels of domestic and world prices, which were largely driven by changes in the wheat balance situation. The most recent switch in support occurred in 2000 and 2001, when the wheat balance altered again from a deficit to a surplus. The fact that shifts from a net exporter to a net importer position cause strong fluctuations in domestic wheat prices (and consequently, in the levels of support), points at the ex- istence of substantial impediments to price arbitrage in the wheat sector. Except for in- frastructural deficiencies inherent in any transition economy, among these impediments there are also policy factors. These policy factors include formal and informal domestic interventions,86 as well as trade barriers, such as the quantitative export restrictions which existed up to 1996, or the tariff protection from imports, which was raised throughout the independence period. The support for maize was quite volatile, and its trends were generally similar to those observed for wheat. The %PSE fell from an average of 85% during the pre-re- form period to minus 8% in 1992, and then increased to positive levels in 1993­1994 (Figure A4.2). In 1995, however, producer support for maize fell below zero, and re- mained negative until 1999 when the next shift from negative to positive support oc- curred. In 2000 %PSE became negative again and recovered to only a marginal positive level of 2% in 2001. The main driving forces behind this trend were analogous to those described for wheat. Thus, temporary shortages in domestic maize supply at the begin- ning of the 1990s, and the consequent switch to net imports, inflated domestic prices to above world market levels. The re-emergence of exportable surpluses led to the fall in domestic price levels, which in 1995­1996 were additionally depressed by the exist- ing export regime (export quotas and licensing). A positive peak in %PSE in 1999 emerged in a situation of a temporary local shortage, with the support falling back to negative and marginally positive levels in 2000­2001 as the country returned to net ex- ports of maize. Barley accounts for over 80% of the aggregate %PSE for other grains (rye, barley and oats), therefore the evolution of the %PSE for other grains is largely driven by the developments in producer support for barley. The %PSE for other grains, as for wheat and maize was at a very high level, reaching on average 79% in 1986­1991 (Figure A4.3). It then declined to minus 91% in 1992, but rose to relatively high pos- itive levels in 1993­1994 (a similar development discussed for wheat and maize). Since the mid-1990s, the support fluctuated between modestly positive (15%) and modestly negative levels (minus 6%) up to 2001. These fluctuations were, however, less pro- nounced than for maize, and in particular, for wheat. One may cautiously suggest that 86The issue of formal and informal administrative practices in the grain market is discussed in the section "Price and Income Support" in Chapter 3. Agricultural Policies and Support for Individual Commodities 175 F I G U R E A 4 . 2 Percentage PSEs, Producer and Reference Prices for Maize, 1986­2001 PSE MPS Producer price Reference price 100 % 600 80 % 480 60 % 360 % n 40 % 240 $/To MPS, d US an 20 % 120 PSE Price, 0 % 0 -20 % -120 -40 % -240 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: OECD F I G U R E A 4 . 3 Percentage PSEs, Producer and Reference Prices for Other Grains (rye, barley, and oats), 1986­2001 PSE MPS Producer price Reference price 100 % 500 50 % 250 % 0 % 0 $/Ton MPS, US and PSE -50 % -250 Price, -100 % -500 -150 % -750 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: OECD 176 Achieving Ukraine's Agricultural Potential the market for other grains (dominated by barley) is characterized by fewer policy dis- tortions than those for wheat and maize and that this market demonstrates a better in- tegration with world trade. Oilseeds Domestic Measures Sunflower seeds account for 95% of the total oilseed output in Ukraine. Before inde- pendence, practically all sunflower seed output was delivered to procurement agencies at fixed procurement prices. Quality premiums were paid for seeds with high oil con- tent. As for grains, supplementary per ton payments for deliveries in excess of a 5-year average level, and special per ton subsidies to low and non-profitable farms were provided. After independence, state procurements of sunflower seeds were continued until 1995. By this year the share of seeds delivered to the state system fell to only 3% of the total volume marketed (compared to 72% in 1991). Product-specific budgetary sup- port, i.e., the fuel and electricity subsidy, was provided only in 1992. Starting from 1993, no product-specific direct subsidies were paid for sunflower seeds. In 1996 the government stopped allocating budgetary funds for the purchase of sunflower seeds, however, for some period afterwards procurement agencies received sunflower seeds as a repayment for input advances under the state commodity credit schemes. At present private traders are the principal buyers of sunflower seeds, mean- ing that the primary oilseed market in Ukraine has been substantially privatized since the start of reforms. The Ukrainian sunflower seed market is highly export-oriented, and trade measures represent the main policy instruments applied to this sector. Trade Measures Between 1992 and 1994 export quotas and licensing existed and in 1993, a 30% ex- port duty was imposed on sunflower seed exports. After the removal of export restric- tions, Ukraine's sunflower exports registered an outstanding growth, rising to 948 thousand tons per year in 1996­1998 from about 200 thousand tons in 1990­1995. With a substantial outflow of sunflower seeds onto external markets, about two thirds of domestic oil crushing capacities remained non-utilized. This led the government to impose a 23% export duty on and set indicative prices for sunflower seeds exports in 1999. The impact of this tax was to some extent reduced by the pos- sibility of duty free exports under the tolling contracts (e.g. to the CIS area). Never- theless, in June 2001 the exports of sunflower seeds under the tolling were prohibited, at the same time the export duty rate was reduced to 17%. The export restrictions caused the fall in sunflower seed exports by about one-third in 1999­2001 (compared to their average level in 1996­1998). At the same time, do- mestic sales rose, and production of oil and oil exports began recovering. Export re- strictions, however, prompted a reduction in the planted area and the production of sunflower seeds by 12% and 35% respectively, which pushed up domestic prices markedly in 2001. Between January 1993 and November 1996, the MFN import duty for sunflower seeds was fixed at 2%. In November 1996, a combined tariff was introduced at 20%, Agricultural Policies and Support for Individual Commodities 177 but not less than ECU 10 per ton, which was increased in 1997 to 50% but not less than ECU 500 per ton under the 1997 Law "On State Customs Tariff." The new Cus- toms Tariff of Ukraine adopted in April 2001, abolished the ad valorem rate and, main- tained only a specific import duty, with its MFN rate of 500 per ton. Border protection for sunflower oil had been also heightening, with the MFN import duty increasing from 10% in January 1993, to 30% but not less than EUR 150 per ton in November 1996. Starting from December 1998, only specific rate of ECU (6) 150 per ton is applied to sunflower oil imports. Trends in The Ukrainian oilseed sector benefited from considerable support in the pre-reform Producer Support period, with the %PSE averaging 81% between 1986 and 1991. The situation reversed drastically in 1992, when the high pre-reform support turned into strong producer tax- ation (Figure A4.4). In 1993­1994 the %PSE recovered to positive levels, following the adjustment of domestic prices to the initial macroeconomic shock. A rapid restora- tion of the domestic sunflower prices was also due to a specific market situation dur- ing these two years: a slight fall in sunflower seed production in 1993 was followed by an outstandingly low crop in 1994. In 1995 the exportable surplus became available, but the export outflow was not sufficient to prevent domestic prices from falling below world market levels. As a result, the %PSE went down to minus 22% in 1995, and since then the implicit producer taxation persisted until 2000. This taxation tended to increase towards the most recent years, reflecting in part the re-introduction of re- strictions on oilseed exports. In general, the negative %PSEs indicate that the receipts of Ukrainian sunflower seed producers were below those which producers would have F I G U R E A 4 . 4 Percentage PSEs, Producer and Reference Prices for Oilseeds (sunflower), 1986­2001 PSE MPS Producer price Reference price 100 % 700 80 % 560 60 % 420 40 % 280 % 20 % 140 $/Ton MPS, 0 % 0 US and PSE -20 % -140 Price, -40 % -280 -60 % -420 -80 % -560 -100 % -700 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: OECD 178 Achieving Ukraine's Agricultural Potential received if no infrastructural and institutional impediments to exports existed and no export-taxing policies were applied. Nevertheless, the %PSE turned positive in 2001, but this was again an indirect consequence of export policies. As was noted above, the domestic supply tightened in 2001 as a reaction to export-restricting measures. This drove domestic prices slightly above world prices, and resulted in %PSE reaching a positive level of 9%. Sugar Beet and Sugar Domestic Measures During the pre-reform period, sugar beet was delivered to sugar plants at fixed procurement prices. The latter were differentiated by 3 zones based on the level of production costs in different locations. Premiums and discounts were applied to the base procurement prices depending on the sugar content of delivered beet. Sugar beet producers also received supplementary per ton payments for deliveries in excess of the average 5-year level, as well as for deliveries ahead of schedule. In 1986­1990 these pay- ments amounted to 10% of sugar beet procurement prices and reached 33% in 1991. In 1992­1994, an indexing mechanism was applied in setting the levels of pro- curement prices, under which the procurement price announced at the beginning of the season was increased monthly based on the input price index. In 1992, beet growers, as well as producers of all basic agricultural commodities, were receiving a fuel and elec- tricity compensation, but starting from 1993, no product-specific direct support was provided for sugar beet. The government stopped allocating budgetary funds for sugar beet purchases in 1995. This left sugar processing plants in an acute cash deficit. The sugar industry adjusted by switching to give-and-take operations, when plants paid beet growers with the sugar processed from delivered beet (typically, about 60% of the sugar processed), while the rest was maintained as compensation for processing services. The proportion established under this sharing mechanism, was one of the principal factors determining sugar beet price levels throughout the second half of the 1990s. In June 1999, the Law of Ukraine No. 758 "On State Regulation of Sugar Pro- duction and Marketing" was enacted, stipulating the new price regime. Thus, a national marketing quota for sugar produced from domestic beet, in-quota minimum sugar beet and minimum sugar prices were fixed (Table A4.1).87 Trade Measures As for many other agro-food products sugar exports were subjected to export quotas and licensing in the initial period of independence. Furthermore, in 1993 a 30% ex- port duty was imposed on Ukrainian white and raw cane sugar exports. These restric- tions were removed in 1994, but between September 1994 and April 1996, indicative export prices were set for these commodities. Since 1993, the Ukrainian sugar sector benefited from a constantly rising border protection. Raw sugar could enter Ukraine with a 10% MFN duty in 1993, which was brought up to 50% but not less than ECU 200 per ton in November 1996. With the ad valorem rate remaining at 50%, the specific rate was heightened to ECU 300 per ton 87For more detail on sugar quota see the section "Price and Income Support" in Chapter 3. Agricultural Policies and Support for Individual Commodities 179 T A B L E A 4 . 1 Domestic Sugar Quota and Minimum Prices 2000 2001 2002 Domestic marketing quota, million tons 2.0 2.0 1.8 Minimum fixed prices, hryvnia per ton* sugar beet 139 165 165 white sugar (wholesale, including VAT) 2 000 2 370 2 370 n.a.: not applicable *As of September 1, base quality. Source: OECD F I G U R E A 4 . 5 Percentage PSEs, Producer and Reference Prices for Sugar, 1986­2001 PSE MPS Producer price Reference price 100 % 800 80 % 640 60 % 480 40 % 320 % $/Ton MPS, 20 % 160 US and PSE Price, 0 % 0 -20 % -160 -40 % -320 -60 % -480 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: OECD in July 1997. In 2000 and 2001, the Ukrainian government applied tariff quota on raw sugar imports equaling 260,000 tons. In-quota imports could be made only between July and September, at a tariff of 1% but not less than 65 per ton. An over-quota tar- iff was fixed at 50%, but not less than 6300 per ton. In 2002, no TRQ for sugar was announced, implying that raw sugar could enter Ukraine only at a regular tariff. Trends in Sugar was one of the most supported commodities in Ukraine under the planned sys- Producer Support tem, with the %PSEs reaching 80% in 1986­1991 (Figure A4.5). This commodity is one of the few analyzed for which positive and relatively high levels of support had 180 Achieving Ukraine's Agricultural Potential been maintained throughout the whole reform period (with only one exception in 1995). The transition period levels of support were, nevertheless, notably lower than those of the Soviet period, and exhibited stronger variations. Thus, %PSE dropped to 26% in 1992, and remained approximately at this level until 1995, when it fell to minus 41%. This abrupt change, in combination with the general factors discussed in Chapter 5, was also driven by a strong fall in sugar beet prices, which occurred when the government stopped allocating budgetary funds for sugar beet procurements in 1995. The situation reversed next year with %PSE increasing to 67%. Producer prices showed some recovery against a strong fall in reference prices in 1996. The strength- ening of domestic prices was helped by a significant increase in white and raw sugar import duty in 1996. Between 1997 and 1999 producer support for sugar decreased from 28% to 15%, reflecting a decline in domestic prices, which was consistent with, but nevertheless much stronger than the fall in world prices for sugar. The protection from Ukrainian sugar imports introduced by Russia in 1997, the major consumer of Ukrainian sugar, led to a drastic decline in export outflows and a downward pressure on domestic prices. Hence, the period between 1997 and 1999 was marked by a notable alignment in domestic and external prices. The trend was, however, inter- rupted in 2000, with the gap between internal and external prices opening again and %PSE rising to 30% by 2001. This result was largely driven by the introduction of a sugar quota regime and the new rise in border protection. Potatoes Domestic Measures Ukraine is one of the world's largest producers of potatoes. Potatoes are regarded as second bread in Ukraine with per capita consumption at about 132 kg per year (the 1998­2001 average). During the years of independence, large-scale commercial culti- vation of potatoes virtually disappeared in Ukraine. Potato growing has become mainly a subsistence activity of households, which cultivate potatoes on small individual plots primarily for self-consumption. The surplus production households sell directly to consumers at city or town markets or deliver to retailers. Today households contribute about 98% to the total potato output in Ukraine. Under the planned system, state procurement agencies, retail trade and the con- sumer co-operative network were the three main channels through which potatoes were marketed. Procurement agencies purchased potatoes at fixed procurement prices, and paid the same types of supplementary per ton payments as for other crop products. Re- tail trade, also part of the state system, applied state-fixed prices for potatoes that were directly delivered to retail stores. In addition to the state network there existed the so-called consumer co-operation system, which was a relatively important marketing channel for horticultural produce. Thus, shortly before the reform, about 35% of the commercial potato output was delivered to this system at the so-called "negotiated" prices. At present, this consumer co-operative network has virtually disappeared in most regions of Ukraine. Deregulation in the potato sector began in 1990, yet before independence, when fixed procurement prices were abolished, and negotiated prices were applied in pur- Agricultural Policies and Support for Individual Commodities 181 chases through all channels, including the state procurement and retail system. How- ever, until the mid-1990s, the government would announce the indicative prices, which were often used in setting the levels of negotiated prices. In 1996 potato procurements were stopped. At present no domestic price regulation is implemented for this commodity. Trade Measures Potato exports from Ukraine are duty free. Between 1993 and 1995, potato producers were protected by a 10% MFN import duty, which was brought down to 5% in January 1996. Import protection was soon considerably raised when a combined tariff was introduced in October 1996 at 50%, but not less than ECU 160 per ton. This rate was increased to 50% but not less than ECU 200 per ton in July 1997, and was then replaced by only a specific duty of ECU (6) 200 per ton in December 1998, which is effective to date. Fruit and Vegetables Domestic Measures During independence, the production of fruit and vegetables fluctuated considerably, but the overall trend was declining. Thus, in 2001 the production of vegetables was at 89% of its 1990 level, while the fruit output decreased to 38%. This was the result of a considerable decline in large-scale production. The latter caused a shift in the pro- duction structure with about 87% of vegetables and 86% of fruit in Ukraine grown on small household plots. The main marketing outlet for household produce is direct sales on city markets or deliveries to retail stores. Before the reforms, price regulation for fruit and vegetables was similar to that for potatoes. In 1990, fixed procurement prices were replaced by negotiated prices in 1990, while state procurements were discontinued two years earlier than for potatoes, in 1994. In 1999 the Ukrainian government adopted a Law "On Levy for Development of Horticulture, Viticulture and Hop Production." According to this Law, a 1% levy is imposed on the proceeds from sales of liquor and beer at the wholesale and retail levels. The levy is accumulated into central and regional funds for support of horticulture, viti- culture and hop growing, and used for compensation of some types of input costs to producers in these sectors. Trade Measures No tariff or other restrictions are applied to the export of fruit and vegetables from Ukraine. As for other agricultural products, import protection for the main horticultural commodities increased during the period of independence. For example, MFN import duty for cucumbers was brought up from 10% in 1993, to 30% but not less than ECU 100 per ton in 1996 and in 2001 a single specific rate of ECU 300 per ton was set. Import duty for apples changed from 10% in 1993 to 30% but not less than ECU 300 per ton in 1996 and to a specific rate of 6500 per ton in 2001. 182 Achieving Ukraine's Agricultural Potential T A B L E A 4 . 2 Per Ton Payments for Milk, 1992­2001 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Total per ton payments*, mln. hryvnia 0.8 33 60 0 0 20 122 119 238 379 Total value of milk production**, mln. hryvnia 2.2 88 488 2 401 3 428 3 830 4 253 5 287 7 118 8 254 of which: receipts from milk marketed to procurement 1.3 54 205 727 719 585 808 981 1 831 2 622 agencies, mln. hryvnia Per ton payments as a share of receipts from milk marketed to procurement agencies, % 60 61 29 0 0 3 15 12 13 14 *Including fuel and electricity compensation in 1992­1993. **Excluding per ton payments. Source: OECD Milk and Milk Products Domestic Measures In 1986­1991, about 73% of all marketable milk was delivered to the state procure- ment system (i.e., milk plants). Procurement prices were fixed and differentiated by two zones. In addition to procurement prices, milk producers received supplementary per ton payments. Special price aids were paid to milk farms in less favored (moun- tainous and piedmont) areas. Per ton payments for milk were quite substantial, con- stituting from 25% to 40% of the total sum of these payments provided for all commodities during 1986­1990. After independence, the official state procurements for milk with announced pro- curement prices, continued until 1995. Since then no formal price regulation has been applied, however, various informal interventions at the local level are quite common (see the section on "Price and income support" in Chapter 3). Direct payments had been the main form of assistance to the milk sector since the beginning of the reform (Table A4.2). Thus, in 1992 and 1993 milk producers received a fuel and electricity compensation, as part of a general assistance to the agricultural sec- tor at the beginning of price liberalization. Supplementary per ton payments were also provided throughout the period of independence (except for 1995­1996) to all pro- ducers delivering milk to milk plants. In 1998, the budgetary financing was replaced by a new mechanism of providing these payments. Thus, the VAT due from milk proces- sors was re-directed to producers supplying raw milk to milk plants. This mechanism was due to be discontinued starting from January 2004, however the government pro- longed it for one more year until January 2005. Finally, since 1992, milk producers re- ceive special per ton premium for ecologically clean milk used for the production of baby food. Trade Measures Until 1994, export quotas and licensing existed for skim and whole milk powder. In 1993, as for other main agro-food commodities, milk products, e.g. skim and whole milk powder and butter, were subjected to a 30% export duty. From September 1994 to April 1996 the government set indicative prices on exported butter and skim milk powder. Agricultural Policies and Support for Individual Commodities 183 F I G U R E A 4 . 6 Percentage PSEs, Producer and Reference Prices for Milk, 1986­2001 PSE MPS Producer price Reference price 100 % 600 80 % 480 60 % 360 40 % 240 % 20 % 120 $/Ton MPS, dna US 0 % 0 PSE Price, -20 % -120 -40 % -240 -60 % -360 -80 % -480 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: OECD In 1993, MFN import tariffs on principal milk products, such as butter, cheese and skim milk, were set at a uniform rate of 5%. In January 1996, a combined import duty was introduced with a 30% ad valorem rate for all three products, and a specific duty ranging from ECU 1,000 per ton for butter; ECU 800 per ton for cheese, and ECU 400 per ton for skim milk. In July 1997, these rates were changed to 50% but not less than ECU 1,500 per ton for butter; 20% but not less than ECU 800 per ton for cheese and 20% but not less than ECU 500 per ton for skim milk. Next change fol- lowed in December 1998, when ad valorem rates for these products were abolished, and only specific tariffs maintained at the same levels. Trends in As for all other basic agricultural products, milk was considerably supported before the Producer Support reform, with the average %PSE reaching 73% in 1986­1991. High pre-reform sup- port switched to strong taxation at the beginning of the reform. Thus, the %PSE for milk dipped to minus 40% in 1992 (Figure A4.6). It recovered to a modest positive level of 18% in 1993, as domestic prices inflated responding to the overall price liber- alization. The negative gap between internal and world prices, which emerged in the first year of the reform narrowed, so that the direct budgetary support was enough to offset negative price transfers. However, in 1994 producer taxation recommenced and was permanently observed since then. Support estimates for milk mostly reflect changes in relative milk price levels on the Ukrainian market compared to external prices, with budgetary support compensating only to a limited extent the negative price gap. Three periods can be distinguished in the evolution of support for milk since 1994: a strong taxation in 1994­1996 (with the average %PSE at minus 40%), a sig- nificant reduction of taxation in 1997­1998, and the restoration of high taxation in 184 Achieving Ukraine's Agricultural Potential 1999­2001 (to minus 28%). The sharp fall in the %PSEs in 1994­1996 is largely ex- plained by the reduction and then the discontinuation of official state procurements and direct budgetary support. Recovery in support in 1997­1998 was driven by a substantial increase in border protection for milk products during this period, which stimulated demand for local products and consequently, prices for raw milk. How- ever, the fall of the Hryvnia after the financial crisis at the end of 1998, pushed the domestic currency equivalents of world prices strongly above the level of domestic prices, causing a considerable increase in implicit producer taxation. Producer taxa- tion returned to a level close to that of 1994­1996, and has since maintained at this approximate level. The fact that Ukrainian domestic milk prices are persistently below the external market level confirms the presence of permanent factors taxing the sector. The most im- portant one is the local monopsony, when milk producers are firmly tied to local milk plants and are in the position of price takers. This local monopsony is supported by an underdeveloped physical infrastructure and inadequate product quality, which severely limits the choice of alternative buyers for milk producers. Policies of some local administrations, obliging milk farms to first serve local plants, further consolidate the monopsonistic situation in the sector. Beef and Veal Domestic Measures A specialized beef industry is not developed in Ukraine and meat production is closely linked with the milk husbandry. Before the reforms, the bulk of cattle was delivered to the state procurement system (i.e., slaughter houses and meat processing plants). Procurement prices were fixed for base quality cattle and differentiated by 7 zones. Quality premiums and discounts complemented base prices. Producers (including households) also received a per ton subsidy for young cattle delivered for slaughter with above average weight. Starting from 1992, a similar policy regime was applied for beef for other livestock products. Thus, formal state purchases based on indicative procurement prices were car- ried out until 1995. Cattle producers also benefited from direct payments. In 1992 they received a fuel and electricity compensation. In 1992­1994 and starting from 1997 pro- ducers delivering cattle to meat plants received supplementary per ton payments (Table A4.3). Since 1998, the same mechanism as for milk, based on a redirection of meat processors' VAT to suppliers of cattle is applied to provide this assistance. Per ton payments for beef are effective until January 2005. In 2001, in addition to VAT-based per ton payments, another direct subsidy was introduced for cattle. Producers selling young cattle with the above average weight (over 375 kg) to procurement agencies became eligible for a special per ton payment. In 2001, about 76 million hryvnia (US$14 million) were due to be paid under this assistance, however producers actually received only 48% of this amount due to a shortage of bud- getary funds. For 2002, 75 million hryvnia (US$14 million) were earmarked in the state budget for the same purpose. Agricultural Policies and Support for Individual Commodities 185 T A B L E A 4 . 3 Per Ton Payments for Cattle, 1992­2001 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Total per ton payments*, mln. hryvnia 1.1 24 34 0 0 11 66 88 168 255 Total value of beef production**, mln. hryvnia 1.9 56 340 1 266 1 811 2 026 1 938 2 360 3 881 4 344 of which: receipts from cattle marketed to procurement agencies, mln. hryvnia 1.6 46 185 460 561 437 461 663 951 1 266 Per ton payments as a share of receipts from cattle marketed to procurement agencies, % 69 54 19 0 0 2 14 13 18 20 *Including fuel and electricity compensation in 1992­1993. **Excluding per ton payments. Source: OECD Trade Measures In 1993, exports of beef meat and processed products were subjected to a 30% tax. Starting from 1994, these commodities were exported from Ukraine duty free. In May 1996, however, the government introduced an export duty on live cattle (75%, but not less than ECU 1,500 per ton) and hides (30%, but not less than ECU 400 per ton), which is effective to date. Exporters of these items, who are at the same time their producers (legal entities), are exempt from the tax. Between September 1994 and April 1996, indicative export prices were applied for beef, and starting from April 1996 and up until the present, indicative prices are set for various groups of live cattle, hides and leather. In 1993, MFN import tariff for beef (frozen carcasses) was fixed at 5%. In No- vember 1996, a combined import tariff was introduced at 30% but not less than ECU 400 per ton, and then increased to 30% but not less than ECU 1,000 per ton in July 1997. Starting from December 1998 only a specific rate is effective equaling ECU (6)1,000 per ton. Currently, Ukraine imposes a ban on import of beef from 20 countries affected by the BSE, including the most recent ban on US beef introduced in December 2003. Trends in The %PSEs for beef reached on average 84% in 1986­1991. At the beginning of the Producer Support transition producer support declined sharply, but remained positive. Although during the first years of the reform domestic prices fell below the world level, budgetary trans- fers were enough to offset the negative price gap (Figure A4.7). However, in 1994­1995 the price gap increased, as Ukrainian beef prices stagnated against rising world prices. During this period, domestic consumption of beef contracted strongly, while export outflows were not sufficient to limit weakening of domestic prices. Under this overall market situation, the government, facing strong budgetary constraints, re- duced beef procurements and in 1995 stopped direct payments. As a result, beef pro- ducers were taxed in 1994 and, particularly strongly, in 1995. In 1996­2001 support recovered following a marked alignment of domestic and external prices, and varied between modestly positive (15%) and modestly negative (minus 8%) levels. 186 Achieving Ukraine's Agricultural Potential F I G U R E A 4 . 7 Percentage PSEs, Producer and Reference Prices for Beef and Veal, 1986­2001 PSE MPS Producer price Reference price 100 % 7000 80 % 5600 60 % 4200 40 % 2800 % n 20 % 1400 $/To MPS, US and 0 % 0 PSE Price, -20 % -1400 -40 % -2800 -60 % -4200 -80 % -5600 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: OECD Pigmeat Domestic Measures During the Soviet period, the state procurement system was the main marketing chan- nel for pigs. Procurement prices were differentiated by 4 zones and similar types of supplementary per ton payments as for milk and beef were provided. In addition, col- lective farms producing pigs were supplied with subsidized feed grain and mixed feeds. The formal state procurements of pigmeat were carried out until 1995; during this period the share of marketable output delivered to the procurement system fell from 47% in 1992 to 17% in 1995. As a way of direct aid, the pig producers received a fuel and electricity subsidy in 1992, and supplementary per ton payments between 1992 and 1994 and starting from 1997 onwards (Table A4.4). Similarly to milk and beef, since 1998 these payments have been financed from VAT due from processors, and are effective until January 2005. Trade Measures In 1993, a 30% export duty on pigmeat and processed products was in effect. This duty was abolished starting from January 1994. Between September 1994 and April 1996, indicative export prices were applied for pigmeat and pigmeat products. The most recent export measure was the introduction of an export tax (27%, but not less than ECU 170 per ton) on pig hides in May 1996, which is maintained to date. In 1993, the MFN import tariff for pigmeat (meat and carcasses) was set at 5%. In November 1996, a combined import tariff was introduced at 30% but not less than ECU 500 per ton, which was increased to 30% but not less than ECU 1,000 per ton Agricultural Policies and Support for Individual Commodities 187 T A B L E A 4 . 4 Per Ton Payments for Pigmeat, 1992­2001 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Total per ton payments*, mln. hryvnia 0.3 6 5 0 0 13 19 29 2 0 Total value of pigmeat production**, mln. hryvnia 1.1 38 286 1 195 1 921 2 498 2 779 2 842 4 342 5 582 of which: receipts from pigs marketed to procurement agencies, mln. hryvnia 0.5 12 50 135 163 101 114 192 269 334 Per tonne payments as a share of receipts from pigs marketed to procurement agencies, % 66 49 11 0 0 13 17 15 1 0 *Including fuel and electricity compensation in 1992­1993. **Excluding per ton payments. Source: OECD in July 1997, and starting from December 1998, only specific duty is applied for pig- meat at ECU (6) 1,000 per ton. Trends in Three periods in the evolution of producer support for pigmeat can be distinguished Producer Support (Figure A4.8). From an average level of 52% in the pre-reform period, % PSE became strongly negative in the first four years of reform (1992­1995), reaching on average minus 52% during this period. As for all analyzed products, a sharp fall in support in 1992 was due to strong macroeconomic impacts, notably the depreciation of the ex- change rate. However, in contrast to other markets, domestic pig prices did not recover F I G U R E A 4 . 8 Percentage PSEs, Producer and Reference Prices for Pigmeat, 1986­2001 PSE MPS Producer price Reference price 80 % 6000 60 % 4500 40 % 3000 20 % 1500 % 0 % 0 $/Ton MPS, d US an -20 % -1500 PSE Price, -40 % -3000 -60 % -4500 -80 % -6000 -100 % -7500 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: OECD 188 Achieving Ukraine's Agricultural Potential T A B L E A 4 . 5 Per Ton Payments for Poultry Meat, 1992­2001 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Total per ton payments*, mln. hryvnia 0.2 2.7 1.5 0 0 4 0 0 0 0 Total value of poultry production**, mln. hryvnia 0.5 18 108 444 622 784 814 1015 1 508 1 819 of which: receipts from poultry marketed to procurement agencies, mln. hryvnia 0.2 6 19 47 42 28 48 44 74 134 Per ton payments as a share of receipts from poultry marketed to procurement agencies, % 76 47 8 0 0 15 0 0 0 0 *Including fuel and electricity compensation in 1992­1993. **Excluding per ton payments. Source: OECD rapidly in the following few years. Among the policy factors contributing to this effect were the export restrictions (in 1993­1994), and a considerable reduction in domes- tic support in 1995. The support rose substantially in 1996, as Ukrainian pigmeat exports increased considerably and strengthened domestic prices, which closely ap- proached external market levels. Since 1996, %PSEs fluctuated between modest neg- ative (minus 2%) and relatively high positive values (33%). Poultry and Eggs Domestic Measures Before reform, poultrymeat and eggs were supplied to the state procurement system at fixed procurement prices. The latter were differentiated by zones and complemented by supplementary per ton payments. As in the pigmeat sector, poultry and egg pro- ducers benefited from subsidized feed grain and mixed feed. After independence, formal state procurements continued in both sectors until 1995. In 1992­1993 poultrymeat and egg producers received a fuel and electricity compensation, as well as supplementary per ton payments. Starting from 1994, all di- rect payments for eggs were stopped. However, poultrymeat producers continued to receive supplementary per ton subsidies in 1994, which after an interruption in 1995­1996, the government began providing again in 1997 (Table A4.5). From 1998, no product-specific direct subsidies are allocated to poultry and egg producers and no formal domestic price regulation is applied. Support to these sectors is provided mainly through border protection. Trade Measures Exports of poultry and eggs from Ukraine are currently duty free. MFN import tariff on poultry meat was increased from 5% in 1993 to 30% but not less than ECU 700 per ton in January 1996, then to 30% but not less than ECU 1,500 per ton in July 1997, which is effective to date. In 2001­2003 Ukraine restricted poultry meat imports from the United States for sanitary reasons. Thus, be- tween November 10 and December 6, 2001, poultry meat shipments from the US were suspended, and between January 2002 and April 2003, a complete ban on import of poultry meat from the US was imposed. Agricultural Policies and Support for Individual Commodities 189 F I G U R E A 4 . 9 Percentage PSEs, Producer and Reference Prices for Poultry Meat, 1986­2001 PSE MPS Producer price Reference price 100 % 5000 80 % 4000 60 % 3000 40 % 2000 % 20 % 1000 $/Ton MPS, US and 0 % 0 PSE Price, -20 % -1000 -40 % -2000 -60 % -3000 -80 % -4000 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: OECD MFN import tariff for eggs went up from 5% in 1993, to 20% but not less than ECU 120 per ton in November 1996, and 30% but not less than ECU 0.05 per piece (about ECU 867 per ton) in July 1997. The next tariff change followed in December 1998, when only a specific duty was set at a level of ECU 50 per ton, which was then increased again to 60.05 per piece (about 6867 per ton) in April 2001, and finally, two months later in July 2001, the currently applied MFN duty rate of 6500 per ton was introduced. Trends in The profile of producer support for poultry meat reveals the case of a relatively highly Producer Support supported net imported commodity. The %PSE for poultry meat fell from an average 58% in 1986­1991 to minus 32% in 1992, but rose to a positive level within the next two years (Figure A4.9). There was a fall in the %PSE in 1995, due to similar reasons discussed earlier for most other commodities, i.e., the considerable contraction of state purchases, such as the reduction in direct budgetary support. There was also an out- standing (almost 18-fold) increase in poultry meat imports in 1995: competition from lower-priced imports further depressed domestic prices. In 1996 the support level began recovering, and increased particularly in 1997­1998 after a strong rise in im- port tariff in 1997, but then went through another fall in 1999 after the financial crisis. In 2000­2001 %PSE reached high positive levels again, 38% and 35% respectively. Trends in support for poultry meat to a large degree reflected the impacts of border protection, which again increased considerably in 2001. As for poultrymeat, Ukraine is a net importer of eggs with this sector benefiting from considerable support. Thus, the %PSEs for eggs were positive throughout the 190 Achieving Ukraine's Agricultural Potential F I G U R E A 4 . 10 Percentage PSEs, Producer and Reference Prices for Eggs, 1986­2001 PSE MPS Producer price Reference price 100 % 5000 80 % 4000 60 % 3000 40 % 2000 % 20 % 1000 $/Ton MPS, US and 0 % 0 PSE Price, -20 % -1000 -40 % -2000 -60 % -3000 -80 % -4000 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: OECD whole period analyzed (with one exception in 1993). Although notably decreased, but still positive in 1990­1995, producer support recovered to the high pre-reform levels between 1996 and 1999, reaching on average 46% during this period (Figure A4.10). High support can be attributed largely to the elevated border protection prevailing dur- ing this period. The decrease in import duty for eggs in 1999 was followed by the fall in %PSE to 1% in 2000. Following a new increase in border protection, the support level recovered to 21% in 2001. A N N E X 5 Agroprocessing Sector 191 192 Achieving Ukraine's Agricultural Potential of 14 90 12 Total mil. 151 306 138 140 742 816 188 (2001) 2597 volume hryvnias investment, end assets food 2001, 169 998 935 781 the mil. 1534 2577 1097 2248 6981 4133 in 21454 industry of Basic at hryvnias enterprises. per year, 1000 55.5 60.1 31.0 94.7 33.2 35.8 39.1 28.8 78.9 54.1 worker per ryvniash 391.9 agricultural Output of output total % 1.3 3.2 4.8 8.2 2.0 1.2 food 10.1 15.0 41.2 13.1 food Percent of 100.0 industry employment, exclude le tab 7710 6653 58359 86200 18266 27458 46912 11773 75257 this Average number workers, ersonsp 236952 575540 of in data % of food The 0.8 5.6 2.9 5.4 1.1 8.4 10.4 16.6 29.8 19.1 100.0 Share total industry output, enterprises. VAT excise), 239 913 339 Food mil. 3242 5178 1730 1678 9274 5939 2607 industry output ryvniash 31137 processing (without and agricultural and 2001 in of food food % 84.7 99.1 71.5 81.0 74.8 83.5 82.7 46.7 99.8 87.8 Share of 100.0 enterprises Ukraine, processing industry total output Ukraine[1], of and 42 63 80 20 processing 248 424 153 245 768 355 2398 by Including large medium Subsectors nterprisese both of Food 32 Statistics. of 854 273 592 499 350 1225 1316 2912 1026 9079 for Number enterprises manufactured Ukraine are of Description and coffee, feeds products .1 starch cocoa, A5 bread tea, Committee food meat and of and products, fish oils products, industry products, sugar, etc.) animal products LE products fats fruits State and mill food and food and Ukraine TAB products milk products animal and vegetables and starches products including bakery pasta, confectionery, chocolate, spices In Subsectors Meat Milk Fish Vegetable Processing Grain Other Prepared Beverages Tobacco Total Source: [1] Agroprocessing Sector 193 T A B L E A 5 . 2 Dynamics of Ukraine Food Industry Output, thousand tons Change Change Commodities 1990 1996 1997 1998 1999 2000 2001 from 1990 from low Meat (including 1st grade meat offal) 2763 760 553 396* 420* 400* 329* -88% 0 Sausages 900 213 206 155 160 175 167 -81% 8% Butter 444 163 117 113 109 135 156 -65% 43% Whole-milk products (in milk equivalent) 6432 915 662 691 700 699 1009 -84% 52% Fatty cheeses 184 59 46 52 53 67 105 -43% 127% Vegetable Oil 1070 705 510 511 577 972 936 -13% 84% Margarine products 289 89 85 97 120 161 198 -31% 134% Granulated sugar 6791 3296 2034 1984 1858 1780 1947 -71% 9% Flour 7671 4965 4320 3890 3368 3068 2981 -61% 0% Bread and bakery products 6701 3452 3060 2676 2510 2461 2449 -63% 0% Cereals 962 456 366 409 344 294 301 -69% 2% Pasta 360 172 142 165 155 116 111 -69% 0% Preserves, millions of cans 4836 1014 1178 1118 1186 1283 1549 -68% 39% Confectionery** 1111 283 328 401 515 668 731 -34% 158% Soft drinks, million deciliters 151 36 45 45 61 66 85 -44% 138% Mineral waters, million deciliters 55 15 22 34 43 49 65 19% 334% Alcoholic drinks, million deciliters 31 25 27 22 23 20 17 -46% 0% Cigarettes, billions 69 45 55 59 54 59 70 0% 55% *Including hog heads. **Not including public catering output. Source: Statistical Yearbook of Ukraine, 2001. T A B L E A 5 . 3 Dynamics of Employment and Output of Food Industry of Ukraine, 1996­2001 Share of total food Annual growth rate in real Output, million hryvnias industry output, % output, %per annum 1996 hryvnias Subsectors 1996 1999 2001 1996 1999 2001 1996­99 1999­01 1996­01 Meat and meat products 2593 1935 3826 18.2% 11.5% 10.9% -13.9% 8.2% -6.8% Milk and milk products 1781 2388 5223 12.5% 14.1% 14.9% -3.2% 10.4% 6.9% Fish and fish products 299 107 334 2.1% 0.6% 1.0% -25.7% 18.6% -11.9% Vegetable and animal oils and fats 619 953 2135 4.3% 5.6% 6.1% -0.4% 10.9% 10.4% Processing of vegetables and fruits 278 482 1219 1.9% 2.9% 3.5% 2.0% 13.6% 15.9% Grain mill products, starches and starch products 1921 1091 2009 13.5% 6.5% 5.7% -18.5% 6.7% -13.0% Sugar processing 1074 1007 2819 7.5% 6.0% 8.0% -9.9% 16.0% 4.5% Bread and bakery products 1917 1767 3258 13.4% 10.5% 9.3% -10.2% 6.7% -4.2% Other food products, including pasta, cocoa, confectionery, chocolate, tea, coffee, spices etc.) 1088 2529 5012 7.6% 15.0% 14.3% 8.1% 8.2% 17.0% Prepared animal feeds 709 271 726 5.0% 1.6% 2.1% -24.7% 15.0% -13.4% Beverages 1691 3038 5939 11.8% 18.0% 16.9% 2.7% 7.9% 10.8% Tobacco products 304 1313 2607 2.1% 7.8% 7.4% 22.4% 8.3% 32.5% Total food industry 14271 16881 35106 100.0% 100.0% 100.0% -5.6% 9.3% 3.2% Source: State Committee of Ukraine for Statistics. 194 Achieving Ukraine's Agricultural Potential T A B L E A 5 . 4 Privatization of Agro-Industrial Enterprises, as of January 1, 2002, number of enterprises Number of Number of Number of Number of Number of enterprises with enterprises with enterprises with enterprises enterprises Sectors of the less than 50% of 50% to 69% of 70% to 99% of with 100% of subject to food industry shares sold shares sold shares sold shares sold privatization Meat industry 3 2 11 113 129 Milk industry 4 5 23 271 303 Vegetable oils and products 2 0 1 40 43 Fruit and vegetable processing (including canned fruit and vegetable) 6 3 10 115 134 Bread and bakery plants 6 2 25 172 205 Grain processing and storage 6 5 90 338 439 Sugar industry 6 6 78 99 189 Agri-service enterprises 66 77 260 2389 2792 Total 99 100 498 3537 4234 Percent 2.3% 2.4% 11.8% 83.5% 100% Source: State Property Fund of Ukraine. T A B L E A 5 . 5 Degree of Privatization by the Value of Shares Sold, Jan 1, 2002, million UAH Shares in Shares in Shares in Shares in enterprises enterprises enterprises enterprises with less with 50% with 70% with 100% Sectors of the than 50% of to 69% of to 99% of of shares food industry shares sold shares sold shares sold sold Total Shares Meat industry 6.9 4.3 19.5 94.5 125.2 Milk industry 1.6 4.7 46.2 148.3 200.8 Vegetable oils and products 33.9 0.0 85.7 33.5 153.0 Fruit and vegetable processing (including canned fruit and vegetable) 4.4 4.5 28.5 108.8 146.2 Bread and bakery plants 15.1 12.6 19.6 65.7 113.0 Grain processing and storage 15.1 6.8 185.8 377.7 585.3 Sugar industry 43.8 25.2 370.2 219.0 658.2 Agri-service enterprises 39.9 67.6 127.0 588.8 823.4 Total 160.6 125.7 882.6 1,636.2 2,805.0 Percent 5.7% 4.5% 31.5% 58.3% 100.0% Source: State Property Fund of Ukraine. Agroprocessing Sector 195 T A B L E A 5 . 6 Direct Foreign Investments Into the Food Industry of Ukraine (as of January 1, 2002) Foreign direct investment Number of Thousand % of food % of food Sectors of the food industry enterprises US$ % of FDI industry FDI industry assets Meat industry 73 26,496.6 0.6% 3.3% 9.3% Milk industry 49 13,237.6 0.3% 1.7% 2.8% Industrial production of fish products 15 3,420.5 0.1% 0.4% 10.9% Vegetable oils and fats products 24 72,316.7 1.6% 9.1% 38.9% Processing of vegetables and fruits 36 31,233.9 0.7% 3.9% 15.3% Processing of grain (production of starches, cereals) 58 11,499.1 0.3% 1.4% 2.7% Production of other food products (bread and bead products, pasta, sugar, confectionery, incl. chocolate, tea, coffee, spicery, etc.) 209 110,137.0 2.5% 13.8% 8.5% Production of animal feed 8 18,507.1 0.4% 2.3% 10.6% Soft drink production 141 408,419.2 9.3% 51.3% 53.1% Tobacco industry 13 100,675.4 2.3% 12.6% 69.2% Total foreign investments into food industry 626 795,943.1 18.1% 100.0% 19.9% Total foreign investments into the national economy of Ukraine 8168 4,406,173.3 100.0% Source: State Committee of Ukraine for Statistics. T A B L E A 5 . 7 Farm to Export Margins in $/ton and as %of Farm Price Farm to Export Margin US$/ton 1996 1997 1998 1999 2000 2001 Wheat 109 -24 12 35 5 10 Barley 36 26 17 33 27 26 Sunflower Seed 76 70 90 98 65 24 Sunflower Oil* 307 229 356 352 160 178 Beef carcass/carcass* 522 224 562 448 282 345 Farm to Export Margin %of Farm Price Wheat 118% -25% 19% 73% 5% 14% Barley 53% 32% 33% 78% 39% 39% Sunflower Seed 52% 49% 69% 80% 68% 17% Sunflower Oil* 102% 69% 161% 226% 87% 79% Beef carcass/carcass* 56% 19% 56% 62% 30% 28% *for sugar, sunflower oil and meats, the raw material is converted to sugar and oil content and carcass weight Source: Calculations based on Data from State Committee of Ukraine for Statistics. 196 Achieving Ukraine's Agricultural Potential T A B L E A 5 . 8 Wholesale Price and Farm to Retail Margins as % of Wholesale Price Wholesale Price US$/ton 1996 1997 1998 1999 2000 2001 Flour 219 246 175 112 171 202 Sunflower Oil 555 561 615 717 488 513 Sugar 450 514 400 287 313 344 Beef 1207 1250 1264 946 993 1646 Milk 209 264 224 169 176 194 Retail to Wholesale Margin %of Wholesale Price 1996 1997 1998 1999 2000 2001 Bread/flour 142% 146% 164% 155% 107% 71% Flour 87% 88% 89% 103% 92% 61% Sunflower Oil 87% 97% 82% 44% 66% 75% Sugar 45% 19% 36% 42% 50% 59% Beef 37% 37% 32% 30% 36% 37% Milk 55% 54% 48% 49% 48% 49% Wholesale to Farm Margin % of Wholesale Price 1996 1997 1998 1999 2000 2001 Flour/wheat 58% 61% 63% 57% 48% 64% Flour/wheat 58% 61% 63% 57% 48% 64% Sunoil/Sunseed* 46% 41% 64% 78% 62% 56% Sugar/SugarBeet* 33% 35% 45% 46% 41% 34% Beef/carcass* 22% 6% 21% 23% 4% 24% Milk/Milk 43% 43% 44% 43% 41% 41% Retail to Farm Margin % of Wholesale Price 1996 1997 1998 1999 2000 2001 Bread/wheat 200% 208% 227% 212% 155% 135% Flour/wheat 145% 149% 152% 160% 140% 125% Sunoil/Sunseed* 133% 138% 146% 122% 128% 131% Sugar/SugarBeet* 78% 55% 80% 88% 91% 94% Beef/carcass* 59% 43% 53% 53% 41% 61% Milk/Milk 98% 98% 91% 92% 90% 90% *for sugar, sunoil and meats, the raw material is converted to sugar and oil content and carcass weight Source: Calculations based on Data from State Committee of Ukraine for Statistics. Agroprocessing Sector 197 T A B L E A 5 . 9 Ukraine Export Prices Compared to World Prices 1996 1997 1998 1999 2000 2001 Wheat 201 72 77 84 94 82 Barley 103 110 68 75 95 92 Sunflower Seed 221 212 221 221 161 170 Sunflower Oil (unrefined) 607 561 578 508 344 405 Beef Carcass 1460 1400 1564 1174 1233 1588 World Price US No. 2 Soft Red Winter, FOB Gulf (FAO) 187 144 111 97 99 107 FOB Pacific Northwest (USDA) 141 114 90 97 104 109 Sunflower EU, cif lower Rhine (FAO) 294 275 309 239 207 244 Sun oil, fob North west European ports (FAO) 576 580 728 507 392 484 Austranian, cow beef, boneless, cif USA (FAO) 1740 1880 1756 1889 1956 2149 World--Ukraine Export 1996 1997 1998 1999 2000 2001 Wheat -14 72 34 13 4 25 Barley 38 5 22 22 8 18 Sunflower Seed 73 63 88 18 45 74 Sunflower Oil -31 19 150 -1 48 79 Beef Carcass 281 480 192 715 723 560 Source: Calculations based on Data from State Committee of Ukraine for Statistics, FAO (2002), and US Department of Agriculture (2002). Achieving Ukraine's Agricultural Potential Stimulating Agricultural Growth and Improving Rural Life PART II Evaluation of Support to Ukrainian Agriculture Methodology and Detailed Tables TABLE OF CONTENTS METHODOLOGY DESCRIPTION...............................................................................................................3 Main indicators: methods of calculation .....................................................................................................8 PSE and TSE by country .........................................................................................................................8 PSE and CSE by commodity ...................................................................................................................8 Producer/Consumer Nominal Protection Coefficient (NPC).................................................................11 Percentage GSSE and TSE ....................................................................................................................11 DEFINITIONS AND SOURCES.................................................................................................................12 General Notes............................................................................................................................................12 Table 1. Total Estimate of Support to Ukrainian Agriculture...................................................................13 Table 4. Market Price Support and Consumer Support Estimate by Commodity.....................................15 DETAILED TABLES.....................................................................................................................................1 Table 1. Total Estimate of Support to Ukrainian Agriculture.....................................................................3 Table 2. Ukraine:Producer Support Estimate by Commodity.....................................................................4 Table 3. Ukraine:Consumer Support Estimate by Commodity...................................................................5 Table 4.1. WHEAT: Market Price Support and Consumer Support Estimate ............................................6 Table 4.2. MAIZE: Market Price Support and Consumer Support Estimate..............................................7 Table 4.3. OTHER GRAINS (rye, barley and oats): Market Price Support and Consumer Support Estimate.......................................................................................................................................................8 Table 4.4. RYE : Market Price Support and Consumer Support Estimate..................................................9 Table 4.5. BARLEY : Market Price Support and Consumer Support Estimate........................................10 Table 4.6. OATS: Market price Support and Consumer Support Estimate...............................................11 Table 4.7. OILSEEDS (Sunfloweerseed): Market Price Support and Consumer Support Estimate.........12 Table 4.8. SUGAR (refined sugar): Market Price Support and Consumer Support Estimate...................13 Table.4.9. MILK: Market Price Support and Consumer Support Estimate...............................................14 Table 4.10. BEEF AND VEAL: Market Price Support and Consumer Support Estimate........................15 Table 4.11. PIGMEAT: Market Price Support and Consumer Support Estimate.....................................16 Table 4.12. POULTRY: Market Price Support Estimate and Consumer Support Estimate .....................17 Table 4.13. EGGS: Market Price Support Estimate and Consumer Support Estimate .............................18 Table 5.1. WHEAT: Producer Support Estimate ......................................................................................19 Table 5.2. MAIZE: Producer Support Estimate ........................................................................................20 Table 5.3. OTHER GRAINS (rye barley and oats): Producer Support Estimate......................................21 Table 5.4. RYE: Producer Support Estimate.............................................................................................22 Table 5.5. BARLEY: Producer Support Estimate.....................................................................................23 Table 5.6. OATS: Producer Support Estimate ..........................................................................................24 Table 5.7. OILSEEDS (Sunflowerseed): Producer Support Estimate.......................................................25 Table 5.8. SUGAR (refined sugar): Producer Support Estimate...............................................................26 Table 5.9. MILK: Producer Support Estimate...........................................................................................27 Table 5.10. BEEF AND VEAL : Producer Support Estimate...................................................................28 Table 5.11. PIGMEAT: Producer Support Estimate.................................................................................29 Table 5.12. POULTRY: Producer Support Estimate ................................................................................30 Table 5.13. EGGS: Producer Support Estimate ........................................................................................31 Table 6. Estimates of Support to Agriculture in Transition Countries, EU and OECD Averages, 1991- 2001...........................................................................................................................................................32 BOXES Box 1. Classification of policy measures included in the OECD indicators of support...............................7 2 METHODOLOGY DESCRIPTION The OECD has, since 1987, measured support to agriculture using the Producer Support Estimate (PSE) and Consumer Support Estimate (CSE).1 With the reform of agricultural policies in OECD countries, the number and complexity of policy measures has increased significantly. A given objective may be achieved through different measures and the economic impacts depend on the way they are implemented. A comprehensive evaluation of recent measures requires grouping policies according to their implementation criteria -- independently of their objectives and effects. This is the basis of the OECD classification system presented here. This Annex explains the coverage, definitions, criteria of classification and methods of calculating the OECD indicators of support associated with agricultural policies. It elaborates on the meaning and interpretation of the concept of market price support and the main indicators of support. It also elaborates on the way the PSE and related indicators are used for policy evaluation. It also presents the method of decomposing the annual variations in the PSE and CSE to calculate the contribution of each component to the country PSE or CSE, Definitions for full-time farmer equivalents and for agricultural land are also provided. The work on implementing the current classification system, presented for the first time in 1999, was undertaken by the Secretariat in close co-operation with Member countries. It provided not only the opportunity to "reclassify" policy measures, but also to "clean up" the databases and calculations for each country to ensure consistency. A description of the policies covered, and the detailed results for all countries, as well as the documentation of the data sources, are available in the Electronic Data Product, OECD PSE/CSE Database. Although the Secretariat has made an effort to ensure consistency in the treatment and completeness of coverage of policies, this exercise should be seen as a dynamic process and the results included in this report have to be seen as preliminary. Future annual exercises will offer the opportunity to revise the calculations for the entire period in the light of more updated information on policy measures. Classification and definitions The current OECD classification of total transfers associated with agricultural policies (TSE), groups the policy measures into three main categories; transfers to producers individually (PSE), transfers to consumers individually (CSE) and transfers to general services to agriculture collectively (GSSE), as in Box 1. I. Producer Support Estimate (PSE): an indicator of the annual monetary value of gross transfers from consumers and taxpayers to support agricultural producers, measured at the farm-gate level, arising from policy measures that support agriculture, regardless of their nature, objectives or impacts on farm production or income. The PSE measures support arising from policies targeted at agriculture relative to a situation without such policies, i.e., one in which producers are subject only to general policies (including economic, social, environmental and tax policies) of the country. Although the PSE is measured net of producer contributions to help to finance a support policy (e.g., through a levy on production) it is fundamentally a gross concept because any costs associated with those policies, and incurred by individual producers, are 1 . Prior to 1999, these indicators were referred to as the Producer Subsidy Equivalent (PSE) and the Consumer Subsidy Equivalent (CSE), respectively. 3 not deducted2. It is also a measure of nominal assistance in the sense that increased costs associated with import duties on inputs are not deducted. The PSE includes both implicit and explicit payments, such as price gaps on outputs or inputs, tax exemptions and budgetary payments, including those for remunerating non-marketed goods and services. The indicator measures, therefore, more than just the "subsidy element." Although farm receipts (revenue)3 are increased (or farm expenditure reduced) by the amount of support, the PSE is not in itself an estimate of the impact on farm production or income. The following paragraphs describe the main components of the PSE. A. Market Price Support (MPS): an indicator of the annual monetary value of gross transfers from consumers and taxpayers4 to agricultural producers arising from policy measures that create a gap between domestic market prices and border prices of a specific agricultural commodity, measured at the farm-gate level. The MPS, which is conditional on the production of a specific commodity, includes the transfer to producers associated with both production for domestic use and export. It is measured by the price gap applied to current unlimited production (a. Based on unlimited output); or, where restrictions on output apply, to current limited production (b. Based on limited output). The MPS is net of financial contributions from individual producers through producer levies on sales of the specific commodity or penalties for not respecting regulations such as production quotas (c. Price levies). In the case of livestock production, it is net of the market price support on domestically produced coarse grains and oilseeds used as animal feed (d. Excess feed cost). B. Payments based on output: a the annual monetary value of gross transfers from taxpayers to agricultural producers arising from policy measures based on current output of a specific agricultural commodity or a specific group of agricultural commodities. These payments, which are conditional on producing a specific commodity, or a specific group of commodities, include payments per tonne, per hectare or per animal on current unlimited production (a. Based on unlimited output), or limited production (b. Based on limited output). C. Payments based on area planted/animal numbers: an indicator of the annual monetary value of gross transfers from taxpayers to agricultural producers arising from policy measures based on current plantings, or number of animals, in respect of a specific agricultural commodity or a specific group of agricultural commodities. These payments, which are conditional on planting a specific crop or crops, or maintaining particular number of livestock, include payment per hectare, or per head, to current unlimited (a. Based on unlimited area or animal numbers), or limited (b. Based on limited area or animal numbers) area planted or animal numbers. D. Payments based on historical entitlements: an indicator of the annual monetary value of gross transfers from taxpayers to agricultural producers arising from policy measures based on historical 2. In other words, elements in the PSE are, in general, gross transfers to producers because, to receive a given payment, producers have to produce or plant a specific commodity, or use a specific input, and therefore incur costs. These costs are not deducted from the amount of the payment, although they may absorb part of the payment. 3. Farm receipts (revenues) are not the same as farm income, which is farm receipts less farm costs. 4 . Transfers from taxpayers occur, for example, when subsidies are used to finance exports. 4 support, area, animal numbers or production of a specific agricultural commodity, or a specific group of agricultural commodities, without obligation to continue planting or producing such commodities. These payments are conditional on being a producer of a specific commodity or a specific group of commodities at the time of the introduction of the payment. The measure includes payments based on historical plantings/animal numbers or production of such commodities (a. Based on plantings/animal numbers or production) and payments based on historical support programmes for such commodities (b. Based on historical support programmes).5 E. Payments based on input use: an indicator of the annual monetary value of gross transfers from taxpayers to agricultural producers arising from policy measures based on the use of a specific fixed or variable input, or a specific group of inputs or factors of production. These payments, which are conditional on the on-farm use of specific fixed or variable inputs, include explicit, and implicit, payments affecting specific variable input costs (a. Based on use of variable inputs); the cost of on-farm technical, sanitary and phytosanitary services (b. Based on use of on-farm services); or affecting specific fixed input costs, including investment costs (c. Based on use of fixed inputs). F. Payments based on input constraints: an indicator of the annual monetary value of gross transfers from taxpayers to agricultural producers arising from policy measures based on constraints on the use of a specific fixed or variable input, or a specific group of inputs, through constraining the choice of production techniques. These payments are conditional on the application of certain constraints (reduction, replacement, or withdrawal) on the on-farm use of specific variable inputs (a. Based on constraints on variable inputs); or fixed inputs (b. Based on constraints on fixed inputs); or based on constraints on the use of a set of farm inputs through constraining the choice of production techniques of marketed commodities for reducing negative externalities or remunerating farm inputs producing non-market goods and services (c. Based on constraints on a set of inputs).6 G. Payments based on overall farming income: an indicator of the annual monetary value of transfers from taxpayers to agricultural producers arising from policy measures based on overall farming income (or revenue), without constraints or conditions to produce specific commodities, or to use specific fixed or variable inputs. These payments, which are conditional on being an eligible farming enterprise or farmer, compensate for farm income fluctuations or losses (a. Based on farm income level), or for guaranteeing a minimum income (b. Based on an established minimum income).7 5. Unlike the others payments to commodities, these payments directly increase farm income by the amount of the payment as producers do not have to incur any specific cost (other than that associated with being a farmer). 6. A payment, which subsidies farm inputs on condition that they are used for producing a non-market good, can be seen as a payment associated with constraints on the use of a set of inputs or on the choice of production techniques. 7. Unlike most of the others, these payments increase farm income directly by the amount of the payment, as producers do not have to incur any specific cost (other than those necessary to generate an eligible level of farm income). 5 H. Miscellaneous payments: an indicator of the annual monetary value of all transfers from taxpayers to agricultural producers that cannot be disaggregated and allocated to the other categories of transfers to producers. These are payments to producers, which cannot be disaggregated due, for example, to a lack of information, and includes payments funded by national governments (a. National payments), or state, regional, prefectural or provincial governments (b. Sub-national payments). II. General Services Support Estimate (GSSE): an indicator of the annual monetary value of gross transfers to general services provided to agriculture collectively, arising from policy measures which support agriculture, regardless of their nature, objectives and impacts on farm production, income, or consumption of farm products. These payments to eligible private or public general service are provided to agriculture generally and not individually to farms. They include payments for collective agri-environmental action and taxpayer's transfers for the following purposes;: improving agricultural production (I. Research and development); agricultural training and education (J. Agricultural schools); control of quality and safety of food, agricultural inputs and the environment (K. Inspection services); improvement of off-farm collective infrastructures, including downstream and upstream industry (L. Infrastructures); assistance to marketing and promotion (M. Marketing and promotion); meeting the costs of depreciation and disposal of public storage of agricultural products (N. Public stockholding and other general services that cannot be disagreggated and allocated to the above categories due, for example, to a lack of information (O. Miscellaneous). Unlike the PSE and CSE transfers, these transfers are not received by producers or consumers individually, and do not directly affect farm receipts (revenue) or consumption expenditure, although they may affect production and consumption of agricultural commodities. III. Consumer Support Estimate (CSE): an indicator of the annual monetary value of gross transfers to (from) consumers of agricultural commodities, measured at the farm-gate level, arising from policy measures which support agriculture, regardless of their nature, objectives or impacts on consumption of farm products. The CSE includes explicit and implicit consumer transfers to producers of agricultural commodities, measured at the farm-gate (first consumer) level and associated with the following market price support on domestically produced consumption (P. Transfers to producers from consumers); transfers to the budget or to importers, or to both, on the share of consumption that is imported (Q. Other transfers from consumers); net of any payment to consumers that offsets their contribution to market price support of a specific commodity (R. Transfers to consumers from taxpayers); and the producer contribution (as consumers of domestically produced crops) to the market price support on crops used in animal feed (S. Excess feed cost). When negative, this indicates transfers from consumers and measures the implicit tax on consumption associated with policies to the agricultural sector. Although consumption expenditure is increased (reduced) by the amount of the implicit tax (payments), this indicator is not, in itself, an estimate of the impact on consumption expenditure. IV. Total Support Estimate (TSE): an indicator of the annual monetary value of all gross transfers from taxpayers and consumers arising from policy measures that support agriculture, net of the associated budgetary receipts, regardless of their objectives and impacts on farm production and income, or consumption of farm products. The TSE is the sum of the following; the explicit and implicit gross transfers from consumers of agricultural commodities to agricultural producers net of producer financial contributions (which appear in MPS and CSE); the gross transfers from taxpayers to agricultural producers (in the PSE); the gross 6 transfers from taxpayers to general services provided to agriculture (GSSE) and the gross transfers from taxpayers to consumers of agricultural commodities (in the CSE). As the transfers from consumers to producers are included in the MPS, the TSE is also the sum of the PSE, the GSSE and the transfers from taxpayers to consumers (in CSE). The TSE measures the overall cost of agricultural support financed by consumers (T. Transfers from consumers) and taxpayers (U. Transfers from taxpayers) net of import receipts (V. Budget revenues). Box 1. Classification of policy measures included in the OECD indicators of support I. Producer Support Estimate (PSE) [Sum of A to H] A. Market Price Support a. Based on unlimited output b. Based on limited output c. Price levies d. Excess feed cost B. Payments based on output a. Based on unlimited output b. Based on limited output C. Payments based on area planted/animal numbers a. Based on unlimited area or animal numbers b. Based on limited area or animal numbers D. Payments based on historical entitlements a. Based on historical plantings/animal numbers or production b. Based on historical support programmes E. Payments based on input use a. Based on use of variable inputs b. Based on use of on-farm services c. Based on use of fixed inputs F. Payments based on input constraints a. Based on constraints on variable inputs b. Based on constraints on fixed inputs c. Based on constraints on a set of inputs G. Payments based on overall farming income a. Based on farm income level b. Based on established minimum income H. Miscellaneous payments a. National payments b. Sub-national payments II. General Services Support Estimate (GSSE) [Sum of I to O] I. Research and development J. Agricultural schools K. Inspection services L. Infrastructure M. Marketing and promotion N. Public stockholding O. Miscellaneous III. Consumer Support Estimate (CSE) [Sum of P to S] P. Transfers to producers from consumers Q. Other transfers from consumers R. Transfers to consumers from taxpayers S. Excess Feed Cost IV.Total Support Estimate (TSE) [I + II + R] T. Transfers from consumers U. Transfers from taxpayers V. Budget revenues 7 Main indicators: methods of calculation PSE and TSE by country To calculate the PSE and the TSE for a given country, the only component that has to be calculated for each commodity is that part of market price support which is financed by consumers. This is because all the other PSE and TSE components are recorded, explicitly or implicitly, as budgetary expenditure. Input subsidies in the form of interest concessions and tax rebates are budget revenue forgone that have also to calculated, but an estimate often appears in the budget. In calculating Total Transfers, the OECD method of calculation starts with the actual total budget transfers associated with agricultural policies. Market price support is calculated for a number of commodities, and the MPS average for these commodities is then applied to all commodities (i.e. to the total value of production of the whole agricultural sector) according to their share in the value of production.8 This method, even when consistently applied across countries, may over-estimate or under- estimate the MPS for particular countries. The larger the share of production covered by the MPS calculation, the smaller the risk of error. Thus, error can be reduced by increasing the products specifically covered by MPS calculations. The larger the share of production covered by the MPS calculation, the smaller the risk of error. Thus, error can be reduced by increasing the commodities specifically covered by MPS calculations -- the "MPS commodities" as referred in this report. PSE and CSE by commodity The calculation of any indicator by commodity needs to have a precise meaning to be useful for policy analysis. In a given year, the allocation of a transfer to specific commodities has a policy meaning only when such a transfer depends on individual farmers' or consumers' decisions or actions and affects, to some extent, commodity production or consumption. This is the case for transfers in the PSE and CSE, but not for transfers in the GSSE and the TSE. As shown in this section, only the calculation of the PSE and CSE by commodity has a meaning useful for policy analysis. All transfers included in the CSE are transfers to (from) individual consumers of a specific commodity and affect consumption decisions relating to that commodity. Therefore, there is no specific conceptual or practical difficulty in the CSE calculation by commodity. All transfers included in the PSE of a given country are transfers to agricultural producers individually that implicitly or explicitly increase gross farm receipts. Some of these transfers influence overall farming receipts across many or all commodities and have to be allocated across commodities. Such allocations are made on a case-by-case basis according to the specific implementation criteria of the policy measure in question. In general, the allocation coefficients are the shares of each commodity in the total value, area, or animal number of all relevant commodities. Market price support, Payments based on output and Payments based on planted area or animal numbers are, by definition, commodity-specific. Payments based on historical entitlements are provided to 8. Tables in Part III show, for each country, the list of commodities for which MPS is explicitly calculated, the amount of the MPS for these commodities and the shares of these commodities in the total value of agricultural production. 8 producers of a specific commodity, or a specific group of commodities, at the moment of introduction of the payment. In some cases, the payment rates are specific to particular livestock or crops, and by farm. Payments based on input use and Payments based on input constraints also affect production decisions concerning the limited group of commodities that a given farm can produce using the inputs in question. As most of these programmes are input-specific (and often specific to regions), they are allocated to the limited group of commodities that can be produced from the inputs and in the regions in question. Payments based on overall farming income allow farmers to produce any agricultural commodity. However, by increasing overall farm receipts, they also influence farmers' decisions to stay in the sector. As most of the programmes in this category are, in practice, region-specific in their basic conditions or implementation requirements, they are, as far as possible, allocated to the relevant commodities. It should be made clear that some of these allocations to commodities are only a proxy for the payments received by producers of such commodities in a given year. That is especially the case of the Payments based on historical entitlements and the Payments based on overall farming income. Therefore, for more than any other group of payments in the PSE by commodity, attention should be drawn to the fact that there is no direct link between the amount allocated to each commodity and the level of production of that commodity. Finally, transfers included in the TSE of a given country include transfers to individual producers and consumers, and transfers to general services provided to agriculture collectively (GSSE). Although some of the GSSE transfers (for example, for research) may be intended for work relating to specific commodities, they do not affect farm receipts or consumer expenditure in such a way that the amounts involved can be directly attributed to producers or consumers. Therefore, the GSSE transfers are not allocated to commodities, as such transfers do not depend on the decisions or actions of any individual farmer or consumer affecting the production or consumption of specific commodities in a given year. Percentage PSE/CSE and producer/consumer NAC The PSE by country and by commodity can be expressed in monetary terms -- the PSE; as a ratio of the value of total gross farm receipts,9 measured by the value of total production (at farm-gate prices), plus budgetary support -- the percentage PSE; or a ratio between the value of total gross farm receipts including support, and production valued at world market prices without support -- the producer NAC (Nominal Assistance Coefficient). In algebraic form, these PSE expressions can be written as follows: %PSE = PSE / (Q·Pp + PP) x 100 (1) (100 - %PSE) = Q·Pb / (Q·Pp + PP) x 100 (2) [100 x 1/(100 - %PSE)] = [%PSE/(100-%PSE) + 1] = [(PSE/Q·Pb) [+- 1]] = NACp (3) Where, PP = Payments to producers = PSE ­ Market Price Support = I.B to I.H (see Box 1) Q·Pp = value of production at producer prices (not including output payments) Q·Pb = value of production at border prices 9. Gross farm receipts are not the same as farm income, which is farm receipts less farm costs. 9 For example, a %PSE of 60%, expresses the share of transfers to agricultural producers in the total value of gross farm receipts (as measured by the PSE), or the share of gross farm receipts derived from policies [equation (1)]. Hence, some 40% of gross farm receipts is derived from the market without any support [equation (2)]. The value of gross farm receipts is two and a half times (or 150% higher than) what they would be if entirely obtained at world prices without any budgetary support [equation (3)] -- a producer NAC of 2.50. When the producer NAC is equal to one, this means that gross farm receipts are entirely derived from the market without any support. Therefore, the higher the producer NAC, the lower (greater) the share of gross farm receipts derived from the market (support). This can be seen as an indicator of market orientation, i.e. the degree of influence of market signals (relative to those from government intervention) on the orientation of agricultural production. All transfers included in the CSE are implicit taxes or explicit budgetary transfers to consumers of agricultural commodities affecting consumer expenditure (valued at the farm gate) of agricultural commodities. Therefore, the CSE by country and by commodity can be expressed in monetary terms -- the CSE as a ratio of the total value of consumption expenditure on commodities domestically produced, measured by the value of total consumption (at farm-gate prices), minus budgetary support to consumers (the percentage CSE); or, a ratio between the total value of consumption expenditure on commodities domestically produced, including support to producers, and consumption valued at world market prices, without budgetary support to consumers (the consumer NAC). In algebraic form, the CSE expressions can be written as follows: %CSE =.CSE/(Qc·Pd - TC) x 100 (4) (100 + %CSE) = Qc·Pb/(Qc·Pd - TC) x 100 (5) [100 x 1/(100 + %CSE)] = [ (1-%CSE)/(100 + %CSE)] = [(CSE/Qc·Pb) [+-] 1] = NACc (6) Where, TC = taxpayer transfers to consumers = III.R. Transfers to consumers from taxpayers (Box 1) Qc·Pd = value of consumption at domestic prices (at the farm gate) Qc·Pb = value of consumption at border prices For example, a %CSE of ­60% indicates that 60% of total consumption expenditure on agricultural commodities represents a transfer from consumers to producers or the share of the consumption expenditure created by policies [equation (4)]. A consumer NAC of 2.50 indicates that expenditure by primary consumers is two-and-a-half times, or 150%, higher than it would have been if it had been conducted entirely at world market prices without any budgetary support to consumers [equation (6)]. When the consumer NAC is equal to one, this means that total consumer expenditure on agricultural commodities is at market prices, without any support to producers and consumers. Therefore, the higher the consumer NAC, the less (more) the share of consumer expenditure reflects the market. The NAC can be seen as an indicator of market orientation, i.e. the degree of influence of market signals (relative to those from government intervention) on the orientation of consumption of agricultural commodities. 10 Producer/Consumer Nominal Protection Coefficient (NPC) The producer NPC measures the ratio between the average price received by producers (at farm gate), including payments based on output (PO/tonne), and the border price (at the farm gate). In algebraic form this can be expressed as follows: NPCp = (Pp + PO/tonne) / Pb = [(Pp - Pb) + PO/tonne] / Pb +1 (7) For example, an NPCp of 2 shows that the price received by farmers is twice the border price. The producer NPC can be seen, therefore, as an estimate of the nominal rate of market protection for producers, or the rate of the implicit export subsidy necessary to export any quantity produced. The consumer NPC measures the ratio between the domestic price paid by consumer (at the farm gate) and the border price (at the farm gate). In algebraic form this can be expressed as follows: NPCc = (Pd / Pb) = (Pp - Pb) / Pb +1 (8) For example, an NPCc of 2 shows that the price paid by consumers is twice the border price. The consumer NPC can be seen, therefore, as an estimate of the nominal rate of market protection for consumers, or the average rate of the implicit import tax applied in the domestic market. Percentage GSSE and TSE For a given country or commodity, the calculation of any of the indicators in percentage terms needs to have a precise meaning. This is the case when both the numerator and the denominator have an economic meaning, and the value of the transfers in the numerator can be seen as an integral part of the denominator.10 Moreover, as percentage indicators take account of the effect of inflation on both the numerator and the denominator, this effect is eliminated. As a result, percentage indicators are more representative and more appropriate measures of support for analysis over time and across countries. The percentage GSSE is defined as the share of support to general services provided to agriculture in the total support to agriculture (TSE), the rest being the support to individual producers and consumers of domestic agricultural commodities. In a situation of public support to agriculture, the higher the percentage GSSE, the lower the share of support affecting individual decisions on domestic production and consumption of agricultural commodities. The TSE includes transfers from taxpayers (which are a component of the total current government expenditure) and transfers from consumers (which are a component of the total domestic consumption expenditure). Both of these transfers, from taxpayers and consumers, are included in Gross Domestic Product (GDP). Therefore, the percentage TSE is defined as the share of total support to agriculture in the total GDP. The higher the percentage TSE, the larger the share of national wealth used to support agriculture. 10. That is the case of the percentage PSE and CSE as defined above. The GSSE and the TSE are not a part of the total value of farm receipts (as is the PSE) nor a part of the total value of consumption expenditure of agricultural commodities (as is the CSE). 11 DEFINITIONS AND SOURCES General Notes The Estimates of Support to Ukrainian agriculture and derived indicators in Table 1 cover all agricultural production, i.e. all agricultural commodities produced in the country. Summary of Producer Support Estimates (PSE) by commodities is presented in Table 2. Summary of Consumer Support Estimates (CSE) by commodities is presented in Table 3. Market Price Support (MPS) and Consumer Support Estimate (CSE) by commodity in Tables 4.1 to 4.13 are calculated for the following commodities: wheat, maize, other grains ( rye, barley, oats), oilseeds, sugar, milk, beef and veal, pigmeat, poultrymeat, and eggs. Definitions are provided only for basic data sets from which all the other data sets in these tables are derived, following the formula indicated in each commodity table. Specific sources are indicated in round brackets. Producer Support Estimates (PSEs) by commodity in Tables 5.1 to 5.13 are calculated for the same commodities as Market Price Support (MPS) and Consumer Support (CSE). All data sets in the calculation of PSEs by commodities come from Tables 4.1 to 4.13 where definitions are included. Level of production and consumption, producer price and reference price for all products as well as budgetary payments are on a calendar year. All values in the tables presented in the Annex are expressed in current local currency (LC): 1986-1991: Roubles; 1992-1995: Ukrainian Karbovanets; 1996-2001: Hryvnia. 12 Table 1. Total Estimate of Support to Ukrainian Agriculture Definitions I. Total value of production (at farmgate): total agricultural production valued at farm gate prices, i.e., value (at farm gate) of all agricultural commodities produced in the country. 1. Of which share of MPS commodities (%): share of commodities for which MPS is explicitly calculated (in Tables 4) in the total value of agricultural production. II. Total value of consumption (at farmgate): consumption of all commodities domestically produced valued at farm gate prices, and estimated by increasing the value of consumption (at farm gate) of the MPS commodities according to their share in the total value of agricultural production [(II.1) / (I.1) x 100]. III.1 Producer Support Estimate (PSE): associated with total agricultural production, i.e. for all commodities domestically produced [Sum of A to H; when negative, the amounts represent an implicit or explicit tax on producers]. A. Market Price Support (MPS): on quantities domestically produced (excluding for on-farm feed use - excess feed cost) of all agricultural commodities, estimated by increasing the MPS estimated for the MPS commodities according to their share in the total value of production [(A.1) / (I.1)]. 1. Of which MPS commodities: sum of the MPS (net of price levies and excess feed cost) for the MPS commodities produced in the country as calculated in Tables 4. B. Payments based on output C. Payments based on area planted/animal numbers D. Payments based on historical entitlements E. Payments based on input use F. Payments based on input constraints G. Payments based on overall farming income H. Miscellaneous payments III.2 Percentage PSE [100*(III.1)/((I)+(B)+(C)+(D)+(E)+(F)+(G)+(H))] III.3 Producer NPC For all agricultural commodities the Producer NPC is estimated as a weighted average of the producer NPC calculated for the individual MPS commodities and shown in Tables 4. For each commodity Producer NPC = [domestic price received by producers (at the farm gate) + unit payments based on output] / border price (also at the farm gate). III.4 Producer NAC [1+(III.2)/(100-(III.2))] 13 IV. General Services Support Estimate (GSSE): total budgetary expenditure to support general services provided to agriculture [Sum (I to O)]. I. Research and development J. Agricultural schools (including academies, institutes) K. Inspection services L. Infrastructure M. Marketing and promotion N. Public stockholding O. Miscellaneous GSSE as a share of TSE V.1 Consumer Support Estimate (CSE): associated with agricultural production, i.e. for the quantities of commodities domestically produced, excluding the quantities used on-farm as feed ­ excess feed costs [(P) + (Q) + (R) + (S); when negative, the amounts represent an implicit tax on consumer]. P. Transfers to producers from consumers: associated with market price support on all domestically produced commodities, estimated by increasing the transfers calculated for the MPS commodities according to their share in the total value of production [(P.1) / (I.1) x 100]. Q. Other transfers from consumers: transfers to the budget associated with market price support on the quantities imported of domestically produced commodities, estimated by increasing the transfers calculated for the MPS commodities according to their share in the total value of production [(Q.1) / (I.1) x 100]. R. Transfers to consumers from taxpayers S. Excess Feed Cost: associated with market price support on quantities domestically produced and used on-farm as feed as calculated in Tables 4. V.2 Percentage CSE (V.1)/[(II)-(R)] V.3 Consumer NPC:For all agricultural commodities the Consumer NPC is estimated as a weighted average of the consumer NPC calculated for the individual MPS commodities and shown in Tables 4. For each commodity Consumer NPC = domestic price paid by consumers (at the farm gate)/ border price (also at the farm gate). V.4 Consumer NAC (V.2) / [1 - (V.2)] VI. Total Support Estimate [(T)+(U)+(V)] or [(III.1)+(IV)+(R)] T. Transfers from consumers -[(P)+(Q)] U. Transfers from taxpayers [(III.1)+(P)+(IV)+(R)] V. Budget revenues [(Q)] 14 Table 4. Market Price Support and Consumer Support Estimate by Commodity Definitions: I. Level of production (1) Wheat, maize, other grains (rye, barley, oats) and oilseeds: Total domestic production. Sugar: Total usable production of white sugar obtained from domestically produced sugar beet. Milk: Total production of milk from dairy cows. Meats: Gross indigenous production, carcass weight. Eggs: Total usable production of eggs in shell. II. Producer prices Wheat, maize, other grains (rye, barley, oats) and oilseeds: Annual average of farm gate prices (all qualities)(1). Sugar: Annual average of sugar beet prices at farm gate converted to white sugar equivalent by dividing sugar beet price by the sugar extraction ratio from sugar beet (1). Milk: Annual average farmgate prices of cow milk. Beef and Veal: Annual average farmgate prices for all categories of adult bovine animals for slaughter, live weight, converted to carcass equivalent (1). Pigmeat: Annual average farmgate prices for all pigs for slaughter, live weight, converted to carcass equivalent (1). Poultry: Annual average farmgate prices of live chickens, converted to carcass equivalent (1). Eggs: Annual average of farmgate prices of fresh eggs for consumption per egg converted to a per tonne basis by dividing by average egg weight (60 g). (1) III. Value of production (at farm gate) [(I)*(II)] IV. Level of consumption Wheat, maize, other grains (rye, barley, oats) and oilseeds: Total domestic use (total production, plus net trade, plus change in stocks) (1,2). White sugar: Total domestic use (total production, plus net trade, plus change in stocks), white sugar equivalent (1,2). Milk: Total domestic use (total production, plus net trade, plus change in stocks) of cow milk, milk equivalent excluding milk used on farm feed (1,2). Meats: Total domestic use (total production, plus net trade, plus change in stocks), carcass weight (1,2). 15 Eggs: Total domestic use (total production, plus net trade, plus change in stocks) (1,2). V. Consumption prices (at farm gate) Implicit prices corresponding to reference prices plus the unit value of market transfers. VI. Value of consumption (at farm gate) [(IV)*(V)] VII. Border prices Wheat: Before 1994: EU export price of standard quality common wheat to specified zones, fob Rouen, calendar year (4). From 1994: Ukrainian export unit values (6). Maize: Before 1994: USA Yellow Corn No.3, c.i.f. Rotterdam, calendar year (4). From 1994: Ukrainian export unit values (6). Barley: Before 1994: EU export price for feed barley, minimum prices fob Rouen of price ranges at weekly free market tenders, net of export restitutions or taxes, calendar year (4). From 1994: Ukrainian export unit values (6). Oats: Before 1994: EU import price, c.i.f. Rotterdam and fob Sweden price, calendar year (4). From 1994: Ukrainian export unit values (6). Rye: German rye unit export value to non EU-members countries (5). Sugar beet, white sugar: EU export price of white sugar, Bourse de Paris (daily prices), fob Europe, calendar year (4). Milk: New Zealand farm gate price of milk, calendar year, actual fat content (a%) and protein content (c%), plus transport cost for butter and skimmed-milk powder in milk equivalent (56 kg and 82 kg per tonne of milk, respectively) from New Zealand to Europe (NZP), adjusted to Ukrainian fat content (b%) and protein content (d%). The reference price is (0.5*(NZP)*((b%/a%)+(d%/c%)). (4) Beef and Veal: Before 1994: EU unit export values in extra-EU trade of meat of frozen bovine animals, calendar year (5). From 1994: Ukrainian export unit values for frozen beef carcasses (6). Pigmeat: EU average unit export values of fresh, chilled, and frozen pigmeat in extra-EU trade, calendar year (5). Poultrymeat: Before 1994: EU export unit values in extra-EU trade of frozen chickens (weighted average of NC 02071015 and NC 02072110 of external trade statistics), calendar year (5). From 1994: Ukrainian import unit values for frozen poultry carcasses (6). Eggs: EU unit export value in extra-EU trade in poultry eggs in shell, fresh or preserved, other than eggs for hatching (NC 04070030 of external trade statistics), calendar year (4). ____________________ Sources: (1) State Committee of Ukraine for Statistics (Derzkomstat). 16 (2) FAO database: FAOSTAT. (3) USDA Economics and Statistics System: The Foreign Agricultural Service's Production, Supply and Distribution (PS&D). (4) OECD PSE/CSE database for the European Union: EU reference price data. (5) EUROSTAT, COMEXT. (6) State Customs Committee of Ukraine. 17 DETAILED TABLES Table 1. Total Estimate of Support to Ukrainian Agriculture Million local currency1 1986-91 1992 1993 1994 1995 1996 1997 1998 1999 2000p 2001e I. Total value of production (at farm gate) data 50 515 1 681 103 63 006 100 386 175 722 1 817 664 263 23 852 25 851 24 958 31 812 46 756 55 696 1. Of which share of MPS commodities (%) data 75.35 64.35 74.01 66.25 57.29 61.22 68.54 65.55 62.51 67.94 72.72 II. Total value of consumption (at farm gate) ((II.1)/(I.1))*100 51 035 1 734 115 59 254 818 404 043 320 1 710 611 549 24 691 24 394 25 509 31 851 47 247 48 391 1. Of which share of MPS commodities (%) data 37 153 1 115 985 43 857 413 267 691 043 980 092 393 15 116 16 720 16 721 19 911 32 100 35 190 III.1 Producer Support Estimate (PSE) (A)+(B)+(C)+(D)+(E)+(F)+(G)+(H) 43 323 -1 070 075 6 331 070 25 499 380 -713 087 725 -986 4 218 3 232 -1 172 -130 3 213 A. Market price support ((A.1)/(I.1))*100 31 886 -1 602 053 -5 882 046 -51 010 149 -848 605 258 -2 190 3 502 2 409 -4 248 -2 535 259 1. Of which MPS commodities data 23 423 -1 030 997 -4 353 592 -33 795 782 -486 207 146 -1 341 2 400 1 579 -2 656 -1 722 188 B. Payments based on output data 5 312 345 107 6 882 191 10 198 600 0 0 48 207 235 407 634 C. Payments based on area planted/animal numbers data 0 0 0 0 0 0 0 0 0 0 0 D. Payments based on historical entitlements data 0 0 0 0 0 0 0 0 0 0 0 E. Payments based on input use data 5 527 55 685 618 108 27 904 391 48 854 887 733 348 364 2 247 1 899 2 140 F. Payments based on input constraints data 0 0 0 0 0 0 0 0 0 0 0 G. Payments based on overall farming income data 598 131 055 4 711 884 38 406 539 81 342 523 468 293 248 589 0 0 H. Miscellaneous payments data 0 131 932 0 5 320 123 3 27 3 5 99 181 III.2 Percentage PSE 100*(III.1)/((I)+(B)+(C)+(D)+(E)+(F)+(G)+(H)) 72 -48 8 6 -37 -4 16 13 -3 0 5 III.3 Producer NPC 4.94 0.55 1.03 0.94 0.66 0.88 1.17 1.13 0.87 0.96 1.01 III.4 Producer NAC 1+(III.2)/(100-(III.2)) 3.81 0.67 1.09 1.06 0.73 0.96 1.19 1.14 0.97 1.00 1.06 IV. General Services Support Estimate (GSSE) (I)+(J)+(K)+(L)+(M)+ (N)+(O) 1 812 72 736 660 780 12 353 220 43 603 420 622 507 511 595 428 578 I. Research and development data 481 17 516 192 854 979 700 4 683 300 58 52 66 66 82 81 J. Agricultural schools data 197 32 218 354 724 1 802 000 6 366 500 83 89 93 115 133 180 K. Inspection services data 145 977 93 513 959 800 4 898 000 42 30 23 46 65 50 L. Infrastructure data 178 22 024 10 514 8 010 600 25 956 300 427 299 298 324 113 232 M. Marketing and promotion data 0 0 0 19 000 114 000 2 13 9 10 8 8 N. Public stockholding data 0 0 0 0 0 0 0 0 0 0 0 O. Miscellaneous data 812 0 9 174 582 120 1 585 320 11 24 22 34 26 26 GSSE as a share of TSE (%) ((IV)/VI))*100 3.3 -7.9 9.4 32.6 -6.5 -170.9 10.7 13.7 -103.0 143.9 15.2 V.1 Consumer Support Estimate (CSE) (P) + (Q) + (R) + (S) -23 862 1 902 174 6 672 024 44 970 886 845 135 742 2 727 -3 158 -2 970 3 713 1 664 -934 P. Transfers to producers from consumers ((P.1)/(I.1))*100 -35 842 1 965 731 4 981 222 36 138 286 845 339 167 3 313 -3 242 -2 734 4 217 2 110 -405 1. Of which share of MPS commodities (%) data -26 221 1 265 041 3 686 848 23 942 718 484 335 843 2 028 -2 222 -1 792 2 636 1 433 -294 Q. Other transfers from consumers ((Q.1)/(I.1))*100 -2 034 135 512 808 345 -1 398 359 39 738 048 -5 -107 -394 -151 -393 -194 1. Of which share of MPS commodities (%) data -1 440 87 209 598 296 -926 456 22 767 857 -3 -74 -258 -94 -267 -141 R. Transfers to consumers from taxpayers data 9 954 74 147 63 926 0 0 0 0 0 0 0 0 S. Excess feed cost data 4 060 -273 216 818 532 10 230 959 -39 941 472 -580 191 157 -354 -52 -335 V.2 Percentage CSE 100* (V.1) / ((II)-(R)) -59 115 11 11 49 11 -13 -12 12 4 -2 V.3 Consumer NPC 4.43 0.45 0.91 0.92 0.66 0.88 1.16 1.14 0.89 0.96 1.01 V.4 Consumer NAC 1-(V.2) / (100+(V.2)) 2.53 0.47 0.90 0.90 0.67 0.90 1.15 1.13 0.90 0.97 1.02 VI. Total Support Estimate (TSE) (III.1)+(IV)+(R) 55 088 -923 192 7 055 776 37 852 600 -669 484 305 -364 4 725 3 743 -577 297 3 791 T. Transfers from consumers -((P) + (Q)) 37 876 -2 101 243 -5 789 567 -34 739 927 -885 077 214 -3 307 3 349 3 127 -4 067 -1 716 599 U. Transfers from taxpayers (III.1) + (P) + (IV) + (R) 19 246 1 042 539 12 036 997 73 990 886 175 854 861 2 949 1 483 1 009 3 640 2 407 3 386 V. Budget revenues (-) (Q) -2 034 135 512 808 345 -1 398 359 39 738 048 -5 -107 -394 -151 -393 -194 Percentage TSE (expressed as a share of GDP) ((VI.)/GDP)*100 n.c. -18.3 4.8 3.1 -12.3 -0.4 5.1 3.6 -0.4 0.2 1.9 p: provisional; e : estimate; n.c.: not calculated. 1. 1986 - 1991 : Rubles; 1992 - 1995 : Ukrainian Karbovanets; 1996 - 2001 : Ukrainian Hryvnias. Source: OECD. 3 Table 2. Ukraine: Producer Support Estimate by Commodity 1986-91 1992 1993 1994 1995 1996 1997 1998 1999 2000p 2001e Wheat PSE (LC mn) 3 693 -284 595 -2 180 262 24 531 316 -51 499 187 -1 510 1 800 467 -286 1 007 279 Percentage PSE 69 -147 -29 49 -33 -61 53 19 -9 19 3 Producer NPC 2.96 0.37 0.71 1.43 0.66 0.57 2.04 1.19 0.82 1.19 0.99 Producer NAC 3.22 0.41 0.77 1.96 0.75 0.62 2.12 1.24 0.91 1.24 1.03 Maize PSE (LC mn) 2 200 -4 246 1 493 553 5 899 341 -7 883 627 -3 -169 -32 71 -163 34 Percentage PSE 85 -8 49 39 -16 -1 -19 -10 15 -10 2 Producer NPC 6.08 0.84 1.80 1.36 0.80 0.94 0.82 0.88 1.06 0.87 0.98 Producer NAC 6.68 0.93 1.96 1.64 0.86 0.99 0.84 0.91 1.17 0.91 1.02 Other grains (rye, barley, oats) PSE (LC mn) 2 128 -113 334 1 935 796 12 368 977 2 195 657 97 120 158 -77 172 -276 Percentage PSE 79 -91 27 36 3 9 7 15 -5 5 -6 Producer NPC 5.26 0.48 1.27 1.23 0.94 1.03 1.05 1.13 0.86 1.01 0.90 Producer NAC 4.75 0.52 1.37 1.57 1.03 1.10 1.08 1.17 0.95 1.05 0.95 Oilseeds PSE (LC mn) 1 155 -38 904 686 411 2 438 310 -14 916 559 -89 -108 -239 -519 -524 172 Percentage PSE 81 -58 24 23 -22 -15 -17 -32 -33 -28 9 Producer NPC 5.09 0.58 1.21 1.06 0.77 0.83 0.83 0.73 0.68 0.75 1.06 Producer NAC 5.16 0.63 1.31 1.30 0.82 0.87 0.85 0.76 0.75 0.78 1.10 Sugar PSE (LC mn) 2 320 31 976 1 305 074 8 285 040 -52 956 132 1 042 351 153 188 409 677 Percentage PSE 80 26 23 24 -41 67 28 14 15 24 30 Producer NPC 6.09 1.24 1.19 1.16 0.67 2.90 1.36 1.14 1.08 1.27 1.37 Producer NAC 5.11 1.36 1.30 1.31 0.71 3.03 1.39 1.17 1.18 1.32 1.43 Milk PSE (LC mn) 7 877 -128 931 2 284 559 -18 802 106 -146 501 521 -1 170 -42 164 -1 494 -2 495 -2 254 Percentage PSE 73 -40 18 -31 -57 -33 -1 4 -26 -33 -25 Producer NPC 4.97 0.57 1.15 0.71 0.58 0.70 0.99 1.03 0.74 0.73 0.77 Producer NAC 3.65 0.71 1.22 0.77 0.64 0.75 0.99 1.04 0.79 0.75 0.80 Beef and Veal PSE (LC mn) 8 747 43 810 2 854 723 -4 029 298 -74 589 002 18 315 -174 -45 566 678 Percentage PSE 84 13 34 -10 -55 1 15 -8 -2 14 14 Producer NPC -3.89 0.87 1.47 0.86 0.57 0.90 1.17 0.92 0.90 1.12 1.12 Producer NAC 6.23 1.16 1.51 0.91 0.64 1.01 1.18 0.92 0.98 1.16 1.17 Pigmeat PSE (LC mn) 2 581 -100 062 -2 308 507 -11 842 503 -77 151 668 371 -62 845 778 348 1 909 Percentage PSE 52 -64 -49 -36 -61 18 -2 30 25 8 33 Producer NPC 3.19 0.43 0.64 0.69 0.55 1.06 0.97 1.42 1.18 1.04 1.41 Producer NAC 2.08 0.61 0.67 0.74 0.62 1.23 0.98 1.42 1.34 1.08 1.50 Poultry PSE (LC mn) 1 340 -24 736 228 905 2 231 236 1 780 787 99 268 352 129 587 662 Percentage PSE 58 -32 10 18 4 15 33 42 12 38 35 Producer NPC 4.14 0.57 1.12 1.18 0.90 1.03 1.51 1.75 1.03 1.54 1.45 Producer NAC 2.36 0.76 1.12 1.22 1.04 1.18 1.50 1.73 1.13 1.60 1.55 Eggs PSE (LC mn) 757 9 144 -90 675 3 376 040 16 363 520 586 461 537 503 14 466 Percentage PSE 41 15 -3 16 22 55 45 49 36 1 21 Producer NPC 3.14 0.65 0.97 1.15 1.14 1.94 1.80 1.93 1.38 0.95 1.19 Producer NAC 1.69 1.17 0.97 1.19 1.29 2.22 1.80 1.95 1.56 1.01 1.27 All commodities PSE (LC mn) 43 323 -1 070 075 6 331 070 25 499 380 -713 087 725 -986 4 218 3 232 -1 172 -130 3 213 Percentage PSE 72 -48 8 6 -37 -4 16 13 -3 0 5 Producer NPC 4.94 0.55 1.03 0.94 0.66 0.88 1.17 1.13 0.87 0.96 1.01 Producer NAC 3.81 0.67 1.09 1.06 0.73 0.96 1.19 1.14 0.97 1.00 1.06 p: provisional; e : estimate; LC : local currency. Source: OECD. 4 Table 3. Ukraine: Consumer Support Estimate by Commodity 1986-91 1992 1993 1994 1995 1996 1997 1998 1999 2000p 2001e Wheat CSE (LC mn) 594 114 701 1 335 021 -9 126 125 42 315 817 1 146 -930 -215 344 -598 46 Percentage CSE 47 80 24 -19 32 51 -40 -10 14 -11 1 Consumer NPC 2.85 0.34 0.71 1.43 0.66 0.57 2.04 1.19 0.82 1.19 0.99 Consumer NAC 0.82 0.56 0.81 1.23 0.76 0.66 1.67 1.11 0.87 1.13 0.99 Maize CSE (LC mn) -385 3 132 -438 464 -1 805 616 2 242 409 14 36 20 -10 54 11 Percentage CSE -17 6 -14 -9 6 2 7 5 -2 5 1 Consumer NPC 5.98 0.78 1.80 1.36 0.80 0.94 0.82 0.88 1.06 0.87 0.98 Consumer NAC 1.21 0.95 1.16 1.10 0.94 0.98 0.94 0.95 1.02 0.95 0.99 Other grains (rye, barley, oats) CSE (LC mn) -479 38 867 -324 355 -3 493 181 -3 076 439 -32 -52 -46 1 -250 14 Percentage CSE -20 37 -6 -16 -4 -2 -4 -4 0 -9 0 Consumer NPC 5.09 0.44 1.26 1.28 0.94 1.00 1.05 1.13 0.85 1.03 0.91 Consumer NAC 1.26 0.73 1.06 1.18 1.04 1.03 1.04 1.05 1.00 1.10 1.00 Oilseeds CSE (LC mn) -831 56 544 -409 582 -485 420 13 224 986 102 75 160 449 547 -89 Percentage CSE -75 118 -17 -6 30 21 20 37 48 33 -5 Consumer NPC 4.57 0.46 1.21 1.06 0.77 0.83 0.83 0.73 0.68 0.75 1.06 Consumer NAC 4.57 0.46 1.21 1.06 0.77 0.83 0.83 0.73 0.68 0.75 1.06 Sugar CSE (LC mn) -949 -1 555 -466 816 -2 613 016 36 851 412 -789 -326 -125 -87 -461 -684 Percentage CSE -75 -2 -16 -14 50 -66 -27 -13 -7 -21 -27 Consumer NPC 5.52 1.02 1.19 1.16 0.67 2.90 1.36 1.14 1.08 1.27 1.37 Consumer NAC 5.52 1.02 1.19 1.16 0.67 2.90 1.36 1.14 1.08 1.27 1.37 Milk CSE (LC mn) -2 459 307 495 1 736 871 26 954 981 164 988 417 1 453 62 14 1 990 2 784 2 620 Percentage CSE -54 147 20 57 72 44 2 0 39 41 36 Consumer NPC 4.26 0.42 0.84 0.64 0.58 0.70 0.98 1.00 0.72 0.71 0.74 Consumer NAC 2.43 0.40 0.83 0.64 0.58 0.70 0.98 1.00 0.72 0.71 0.74 Beef and Veal CSE (LC mn) -4 906 193 189 -133 559 10 738 413 96 297 857 197 -295 259 371 -249 -236 Percentage CSE -85 87 -2 28 75 12 -14 13 16 -6 -5 Consumer NPC -4.36 0.54 1.02 0.78 0.57 0.90 1.16 0.89 0.86 1.07 1.05 Consumer NAC -1.85 0.53 1.02 0.78 0.57 0.90 1.16 0.89 0.86 1.07 1.05 Pigmeat CSE (LC mn) -2 003 280 903 3 751 709 16 961 881 117 970 735 -124 120 -1 001 -482 -197 -1 555 Percentage CSE -48 204 80 47 81 -5 4 -29 -14 -4 -29 Consumer NPC 2.92 0.33 0.56 0.68 0.55 1.06 0.96 1.41 1.17 1.04 1.41 Consumer NAC 2.00 0.33 0.56 0.68 0.55 1.06 0.96 1.41 1.17 1.04 1.41 Poultry CSE (LC mn) -1 334 70 023 48 982 -1 535 768 4 781 114 -27 -344 -437 -37 -599 -588 Percentage CSE -73 129 3 -14 11 -3 -33 -43 -2 -35 -31 Consumer NPC 3.97 0.44 0.97 1.16 0.90 1.03 1.50 1.75 1.03 1.54 1.45 Consumer NAC 3.97 0.44 0.97 1.16 0.90 1.03 1.50 1.75 1.03 1.54 1.45 Eggs CSE (LC mn) -1 070 28 547 67 794 -2 348 929 -8 434 082 -495 -451 -523 -351 84 -310 Percentage CSE -66 54 3 -13 -12 -48 -44 -48 -28 5 -16 Consumer NPC 3.12 0.65 0.97 1.15 1.14 1.94 1.80 1.93 1.38 0.95 1.19 Consumer NAC 3.12 0.65 0.97 1.15 1.14 1.94 1.80 1.93 1.38 0.95 1.19 All commodities CSE (LC mn) -23 862 1 902 174 6 672 024 44 970 886 845 135 742 2 727 -3 158 -2 970 3 713 1 664 -934 Percentage CSE -59 115 11 11 49 11 -13 -12 12 4 -2 Consumer NPC 4.43 0.45 0.91 0.92 0.66 0.88 1.16 1.14 0.89 0.96 1.01 Consumer NAC 2.53 0.47 0.90 0.90 0.67 0.90 1.15 1.13 0.90 0.97 1.02 p: provisional; e : estimate; LC : local currency. Source: OECD. 5 Table 4.1. WHEAT: Market Price Support and Consumer Support Estimate Units 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000p 2001p I. Level of production 000t 18 411 19 655 21 710 27 400 30 374 21 155 19 507 21 831 13 857 16 273 13 547 18 404 14 937 13 585 10 197 21 348 1. of which feed 000t 10 531 7 966 9 230 8 030 11 493 11 542 10 285 7 634 6 822 5 852 4 179 2 831 4 762 3 985 2 898 2 170 II. Producer price (at farm gate) LC/t 105 105 113 116 276 422 8 335 315 300 2 650 359 8 386 639 169 178 158 200 487 386 III. Value of production (at farm gate) LC mn 1 933 2 064 2 453 3 178 8 383 8 927 162 591 6 883 314 36 726 027 136 475 779 2 287 3 272 2 360 2 722 4 966 8 241 IV. Level of consumption 000t 17 053 21 329 21 303 24 692 27 980 22 969 17 339 17 900 18 246 15 695 13 320 13 082 13 303 11 968 10 705 12 855 V. Consumption price (at farm gate) LC/t 105 105 113 116 276 422 8 335 315 300 2 650 359 8 386 639 169 178 158 200 487 386 VI. Value of consumption (at farm gate) LC mn 1 791 2 240 2 407 2 864 7 722 9 693 144 521 5 643 870 48 358 453 131 628 301 2 249 2 326 2 102 2 398 5 213 4 962 VII. Reference price (at farm gate) LC/t 33 36 47 71 78 120 24 529 441 770 1 851 499 12 685 557 294 87 133 243 410 390 1. Border reference price (f.o.b. or c.i.f.) USD/t 91 96 115 157 142 98 132 117 75 128 201 72 77 84 94 82 2. Handling and processing costs LC/t 21 21 23 23 33 51 4 160 113 472 634 000 4 978 977 72 61 71 99 131 118 3. Quality adjustment ratio 1.00 1.00 1.00 1.00 1.00 1.00 1.05 1.05 1.05 0.93 0.99 1.10 1.08 0.99 1.05 1.16 4. Official exchange rate LC / USD 0.60 0.60 0.60 0.60 0.78 1.75 208.00 4 539.00 31 700.00 147 307.00 1.83 1.86 2.45 4.13 5.44 5.37 VIII. Market price differential LC/t 72 69 66 45 198 302 -16 194 -126 470 798 860 -4 298 918 -125 91 25 -43 77 -4 IX. Market transfers LC mn 467 916 803 748 3 260 3 453 -114 223 -1 298 380 9 126 125 -42 315 817 -1 146 930 215 -344 598 -46 1. Transfers to producers from consumers LC mn 1 221 1 347 1 416 1 108 5 533 6 391 -280 780 -2 263 811 11 069 803 -67 471 516 -1 669 1 187 335 -516 782 -56 2. Other transfers from consumers LC mn 0 115 0 0 0 548 0 0 3 506 197 0 0 0 0 0 39 0 3. Excess feed cost LC mn 754 546 614 360 2 273 3 487 -166 557 -965 431 5 449 875 -25 155 698 -524 257 120 -172 222 -9 X. Budgetary transfers LC mn 927 571 1 502 1 813 1 989 7 127 -34 629 -460 512 0 -2 484 775 -28 483 41 -70 0 -37 1. Transfers to producers from taxpayers LC mn 97 0 27 122 473 0 -35 108 -497 153 0 -2 484 775 -28 483 41 -70 0 -37 2. Transfers to consumers from taxpayers LC mn 830 571 1 475 1 692 1 515 7 127 478 36 641 0 0 0 0 0 0 0 0 3. Price levies (-) LC mn 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 XI. Market Price Support (MPS) LC mn 1 318 1 347 1 443 1 230 6 006 6 391 -315 888 -2 760 964 11 069 803 -69 956 290 -1 698 1 670 376 -585 782 -92 XII. Producer NPC ratio 3.15 2.88 2.44 1.94 3.53 3.81 0.37 0.71 1.43 0.66 0.57 2.04 1.19 0.82 1.19 0.99 1. Payments on output total LC mn 1 1 8 605 0 743 13 267 0 0 0 0 0 0 0 0 0 2. Payments on output per tonne LC/t 0 0 0 22 0 35 680 0 0 0 0 0 0 0 0 0 XIII. Consumer Support Estimate (CSE) LC mn 363 -344 672 944 -1 745 3 675 114 701 1 335 021 -9 126 125 42 315 817 1 146 -930 -215 344 -598 46 1. Unit CSE LC/t 21 -16 32 38 -62 160 6 615 74 582 -500 171 2 696 134 86 -71 -16 29 -56 4 2. Percentage CSE % 38 -21 72 81 -28 143 80 24 -19 32 51 -40 -10 14 -11 1 XIV. Consumer NPC ratio 3.14 2.88 2.43 1.63 3.53 3.52 0.34 0.71 1.43 0.66 0.57 2.04 1.19 0.82 1.19 0.99 XV. Consumer NAC ratio 0.73 1.26 0.58 0.55 1.39 0.41 0.56 0.81 1.23 0.76 0.66 1.67 1.11 0.87 1.13 0.99 III : data or [(I) * (II)/1000] X.1: =IF((IV)>(I),0,((I)-(IV)) *(VIII.)/1000) V: (II)-((IX.1)+(X.1))/(I)*1000+((IX.1)+(IX.2))/(IV)*1000 XI: (IX.1) + (X.1) + (X.3) VI : (IV) * (V) / 1000 XII: 1/[100-(IX.1+X.1+XII.1)/(III.+XII.1)*100]*100 VII: (VII.1)*(VII.3)*(VII.4)-(VII.2) XII.2: (XII.1)/(I)*1000 VIII: (II) - (VII) XIII: (X.2) - ((IX.1) + (IX.2) - (IX.3)) IX: (IX.1) + (IX.2) - (IX.3) XIII.1: (XIII) / (IV)*1000 IX.1 =IF((IV)>(I),(VIII.)*(I)/1000,(VIII.)*(IV)/1000) XIII.2: 100* (XIII)/((VI) - (X.2)) IX.2: =IF((IV)<(I),0,((IV)-(I))*(VIII.)/1000) XIV: 1/[100-(IX.1+IX.2)/VI.*100]* 100 IX.3: =IF((1)<(I),(1)*(VIII.)/1000,(I)*(VIII.)/1000) XV: 1-(XIII.2)/(100+(XIII.2)) X: (X.1) + (X.2) + (X.3) 6 Table 4.2. MAIZE: Market Price Support and Consumer Support Estimate Units 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000p 2001p I. Level of production 000t 8 011 8 308 8 638 7 026 4 737 4 747 2 851 3 786 1 539 3 392 1 837 5 340 2 301 1 737 3 848 3 641 1. of which feed 000t 5 795 5 619 6 158 6 084 4 564 4 747 2 812 2 846 1 539 1 953 1 571 2 352 1 829 1 415 1 896 2 315 II. Producer price (at farm gate) 253 233 236 272 420 728 16 024 744 100 8 120 660 13 445 170 248 159 140 251 386 454 III. Value of production (at farm gate) LC mn 2 027 1 936 2 039 1 911 1 990 3 456 45 684 2 817 163 12 497 696 45 606 017 456 851 323 436 1 487 1 654 IV. Level of consumption 000t 8 033 6 915 8 855 8 017 5 009 5 586 3 497 4 168 2 374 2 621 2 477 3 364 2 860 2 190 2 795 3 300 V. Consumption price (at farm gate) LC/t 253 233 236 272 420 728 16 024 744 100 8 120 660 13 445 170 248 159 140 251 386 454 VI. Value of consumption (at farm gate) LC mn 2 032 1 611 2 090 2 181 2 104 4 067 56 036 3 101 409 19 278 447 35 239 791 615 536 401 550 1 080 1 500 VII. Reference price (at farm gate) LC/t 35 30 51 52 65 157 20 597 412 375 5 958 246 16 803 670 263 195 160 237 446 466 1. Border reference price (f.o.b. or c.i.f.) USD/t 101 91 127 130 127 123 117 116 196 140 171 131 89 77 100 104 2. Handling and processing costs LC/t 26 24 25 27 34 58 5 200 145 248 634 000 5 155 745 71 61 71 99 131 118 3. Quality adjustment ratio 1.00 1.00 1.00 1.00 1.00 1.00 1.06 1.06 1.06 1.07 1.07 1.05 1.06 1.06 1.06 1.05 4. Official exchange rate LC / USD 0.60 0.60 0.60 0.60 0.78 1.75 208.00 4 539.00 31 700.00 147 307.00 1.83 1.86 2.45 4.13 5.44 5.37 VIII. Market price differential LC/t 218 203 185 220 355 571 -4 573 331 725 2 162 414 -3 358 500 -15 -35 -19 14 -60 -11 IX. Market transfers LC mn 488 263 498 426 158 479 -3 132 438 464 1 805 616 -2 242 409 -14 -36 -20 10 -54 -11 1. Transfers to producers from consumers LC mn 1 746 1 404 1 594 1 548 1 679 2 710 -13 038 1 255 909 3 327 956 -8 802 628 -28 -119 -45 23 -167 -37 2. Other transfers from consumers LC mn 5 0 40 218 96 479 -2 954 126 719 1 805 616 0 -10 0 -11 6 0 0 3. Excess feed cost LC mn 1 263 1 141 1 136 1 341 1 618 2 710 -12 860 944 164 3 327 956 -6 560 219 -24 -83 -35 19 -114 -26 X. Budgetary transfers LC mn 0 283 0 0 0 0 0 0 0 -2 589 403 0 -70 0 0 -63 -4 1. Transfers to producers from taxpayers LC mn 0 283 0 0 0 0 0 0 0 -2 589 403 0 -70 0 0 -63 -4 2. Transfers to consumers from taxpayers LC mn 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3. Price levies (-) LC mn 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 XI. Market Price Support (MPS) LC mn 1 746 1 687 1 594 1 548 1 679 2 710 -13 038 1 255 909 3 327 956 -11 392 031 -28 -190 -45 23 -231 -41 XII. Producer NPC ratio 7.22 7.78 4.59 5.43 6.42 5.02 0.84 1.80 1.36 0.80 0.94 0.82 0.88 1.06 0.87 0.98 1. Payments on output total LC mn 0 0 1 59 0 287 3 727 0 0 0 0 0 0 0 0 0 2. Payments on output per tonne LC/t 0 0 0 8 0 61 1 307 0 0 0 0 0 0 0 0 0 XIII. Consumer Support Estimate (CSE) LC mn -488 -263 -498 -426 -158 -479 3 132 -438 464 -1 805 616 2 242 409 14 36 20 -10 54 11 1. Unit CSE LC/t -61 -38 -56 -53 -32 -86 896 -105 198 -760 580 855 555 6 11 7 -5 19 3 2. Percentage CSE % -24 -16 -24 -20 -8 -12 6 -14 -9 6 2 7 5 -2 5 1 XIV. Consumer NPC ratio 7.22 7.78 4.59 5.27 6.42 4.64 0.78 1.80 1.36 0.80 0.94 0.82 0.88 1.06 0.87 0.98 XV. Consumer NAC ratio 1.32 1.20 1.31 1.24 1.08 1.13 0.95 1.16 1.10 0.94 0.98 0.94 0.95 1.02 0.95 0.99 III : data or [(I) * (II)/1000] X.1: =IF((IV)>(I),0,((I)-(IV)) *(VIII.)/1000) V: (II)-((IX.1)+(X.1))/(I)*1000+((IX.1)+(IX.2))/(IV)*1000 XI: (IX.1) + (X.1) + (X.3) VI : (IV) * (V) / 1000 XII: 1/[100-(IX.1+X.1+XII.1)/(III.+XII.1)*100]*100 VII: (VII.1)*(VII.3)*(VII.4)-(VII.2) XII.2: (XII.1)/(I)*1000 VIII: (II) - (VII) XIII: (X.2) - ((IX.1) + (IX.2) - (IX.3)) IX: (IX.1) + (IX.2) - (IX.3) XIII.1: (XIII) / (IV)*1000 IX.1 =IF((IV)>(I),(VIII.)*(I)/1000,(VIII.)*(IV)/1000) XIII.2: 100* (XIII)/((VI) - (X.2)) IX.2: =IF((IV)<(I),0,((IV)-(I))*(VIII.)/1000) XIV: 1/[100-(IX.1+IX.2)/VI.*100]* 100 IX.3: =IF((1)<(I),(1)*(VIII.)/1000,(I)*(VIII.)/1000) XV: 1-(XIII.2)/(100+(XIII.2)) X: (X.1) + (X.2) + (X.3) 7 Table 4.3. OTHER GRAINS (rye, barley and oats): Market Price Support and Consumer Support Estimate